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Frequently Asked Questions
Staff Interpretation Letter 2015-2
Identification Number
1138

This is in response to your correspondence requesting an exception under Listing Rule 5635(f) to Nasdaq’s otherwise applicable shareholder approval requirements with respect to a proposed issuance of securities (the “Proposed Transaction”).

You represented that the Company, a biopharmaceutical company, has experienced delays in government funding for its lead product candidate, and has been unsuccessful in securing alternative funding to continue operations. Additionally, in its most recent Annual Report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You stated that, without the Proposed Transaction, the Company is in imminent danger of being unable to meet its monthly payroll, lease payments and other obligations and has only enough cash to fund operations for a month, at which time it will be forced to initiate steps to cease operations, in addition to laying-off or furloughing many of its scientific employees.

In the Proposed Transaction, you stated that the Company will issue shares of common stock to one investor equal to greater than 20% of the existing total shares outstanding at a price per share expected to be greater than current market and book value. However, due to fluctuation in the Company’s stock price, the ultimate price per share of the common stock may potentially be at a discount to market value. Additionally, following the closing of the Proposed Transaction, the sole investor will obtain greater than 50% voting power and beneficial ownership in the company.

You stated that the Company has pursued multiple alternative sources of financing for more than one year, completing smaller financings that raised limited funds but failing to complete several larger transactions, including the sale of common stock in a public offering that reached late stage negotiations, but was ultimately unsuccessful. Despite these efforts, you represented that there are currently no realistic alternatives to the Proposed Transaction and that the proposed investor is unwilling to structure the Proposed Transaction in a manner consistent with the shareholder approval rules. As a result, there is not enough time to obtain shareholder approval prior to the issuance of the shares of common stock in the Proposed Transaction before the Company runs out of cash. You further indicated that if the Proposed Transaction is not completed in the very near term, the Company will be forced to cease operations, including all product development efforts, and terminate or furlough scientific employees, and that the result of these actions may negatively affect the Company’s ability to obtain government funding. Additionally, you stated that given the potential negative effects on the Company’s operations, the Company sought advice from bankruptcy counsel. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.

Without the requested exception, shareholder approval would be required:

  • pursuant to Listing Rule 5635(b) because the Proposed Transaction would result in a change of control of the Company due to the fact that the sole investor will own greater than 50% of the common stock and voting power outstanding upon completion of the Proposed Transaction; and
  • pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price that may be less than the greater of book or market value.

Based on our review of the circumstances described in your correspondence and your representations regarding: (i) the Company’s financial condition, (ii) the dire consequences to the Company should it not obtain the financing provided by the Proposed Transaction, and (iii) the Company’s expectation that it will remain in compliance with all applicable continued listing requirements, we have determined to grant the requested exception to the shareholder approval rules. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration received) and alerting shareholders to the omission to seek the otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.

Publication Date*: 9/14/2015 Identification Number: 1138 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2013-1
Identification Number
1078
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from NASDAQ’s shareholder approval requirements with respect to proposed issuances of securities (the “Proposed Transaction”).

The Company, a bank holding company, conducts banking operations through its wholly owned subsidiary (the “Bank”). You stated that the Company has suffered significant operating losses for the fiscal years 2009, 2010 and 2011, and expects to report a loss for the fiscal year ended December 31, 2012. In its most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern.

While the Bank had been considered “adequately capitalized” by bank regulators prior to October 30, 2012, based on its September 30, 2012 Report of Condition and Income, the Bank was deemed “undercapitalized.” Furthermore, based on preliminary year end results for 2012, the Company expects the Bank’s Tier 1 leverage ratio to continue to decrease, and the Bank is expected to be classified as “significantly undercapitalized” based on its December 31, 2012 financial information. The Company’s losses are expected to continue in the first quarter of 2013, which could result in the Bank being deemed “critically undercapitalized” as of March 31, 2013, thus triggering the process to appoint a receiver or conservator of the Bank. As the Bank is the only material asset of the Company, the receivership of the Bank would cause the loss of any remaining value to the Company’s shareholders.

In the Proposed Transaction, the Company would issue common stock in connection with an exchange of currently outstanding preferred stock and a private placement. The preferred stock was issued to the United States Treasury Department (the “Treasury Department”) under the Troubled Asset Relief Program. The Treasury Department has agreed to exchange the preferred stock for common stock in an amount equal to a substantial discount to the principal amount plus accrued and unpaid dividends (the “Exchange”). Following the Exchange, the Company would conduct a private placement of common stock issuing shares to outside investors (the “Investors”) at the same price as the Exchange (the “Private Placement”). The Treasury Department will enter into separate agreements to sell the shares of common stock it receives in the Exchange to the Investors. In addition, as a condition imposed by the Investors, officers and directors of the Company (the “Insiders”) will purchase shares in the Private Placement on the same terms as the Investors. The common stock issued in the Exchange and in the Private Placement will be priced at a significant discount to the current market value. Finally, as promptly as practicable following the closing of the Private Placement, the Company will conduct a rights offering for shareholders, including the Insiders, that owned shares prior to the Exchange and Private Placement, which would allow these shareholders to purchase shares of common stock at the same price as the Exchange. It is anticipated that the Insiders’ total investment would be no more than 3% of the Proposed Transaction.

Given the Bank’s critical capital levels and regulatory pressures, the Company requires a substantial investment in order to return the Bank to a “well-capitalized” regulatory position. As a result, the proposed issuance of common stock is significantly greater than 20% of the pre-transaction total shares outstanding. You stated that the Company has pursued multiple alternative financing strategies for over one year, and that there are no realistic alternatives to the Proposed Transaction. The Company did not anticipate that obtaining shareholder approval would be a significant hurdle, but delays caused by ongoing negotiations about the Proposed Transaction, a hostile takeover that did not proceed, and delays in receiving regulatory approval, as well as the Company’s continuing losses, have all contributed to a situation in which the time needed to obtain shareholder approval would seriously jeopardize the financial viability of the Company. In addition, the Investors’ willingness to participate in the Proposed Transaction is conditioned on the transaction being sufficient to return the Bank to a “well-capitalized” position, necessitating an issuance of stock in excess of 20% of the outstanding shares. You stated that if the Proposed Transaction is not completed in the very near term, the Company will be forced to file for bankruptcy protection or bank regulatory authorities may appoint a receiver or conservator for the Bank, which you indicated would result in a complete loss for the existing shareholders.

The Company expects that the Proposed Transaction would return the Bank to the regulatory category of “well-capitalized” and prevent it from falling into receivership. In addition, the Company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ.

Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(c) because the issuance of discounted common stock to the officer and directors would be considered equity compensation and Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and the appointment of a conservator or a receiver for the Bank. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.

As an additional matter, this exception applies only to the Proposed Transaction and not to any other issuances of securities which you stated may occur following the completion of the Proposed Transaction.

Publication Date*: 4/15/2013 Identification Number: 1078 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-8
Identification Number
1069
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to proposed issuances of securities (the “Proposed Transactions”). In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”).

The Company, a savings and loan holding company, conducts banking operations through its operating subsidiary (the “Bank”) and does not have any significant business or assets apart from its ownership of the Bank. You stated that for the past several years, the Bank has experienced very substantial increases in loan delinquencies and defaults due primarily to unfavorable economic conditions including the downturn in the real estate market in its service area. As a result, the Company has reported substantial losses for each of the past two years and does not have sufficient cash to meet its operating expenses. In its report in the most recent Form 10-K, the Company’s independent auditor included the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern.

The banking regulators determined that the Company and the Bank are in “troubled condition” which is a regulatory designation resulting in substantial restrictions on the operations of both the Company and the Bank enforced through Cease and Desist Orders (the “Orders”). Pursuant to the Orders, the Company is required to maintain capital ratios higher than otherwise required and is not permitted to incur, make payments on, or increase any debt without the approval of its regulators. As a result, the Company is in default on a substantial amount of its outstanding debt, including a credit facility which is secured by the assets of the Company (the “Debt”). To preserve capital, the Company has closed two of the five branch offices of the Bank and has sold its headquarters building. In addition, the Company has sold other assets, including non-performing loans.

In the Proposed Transactions, the company would issue common stock, or securities which would be convertible into common stock (the “Convertible Securities”), in exchange for currently outstanding preferred stock and a portion of the Debt. The Convertible Securities would vote on an as-converted basis. The exchange for the preferred stock would be at a 50% discount to the liquidation preference and would also be in satisfaction of accrued but unpaid dividends. The U.S. Treasury Department would also exchange preferred stock it was issued under the Troubled Asset Relief Program and, as a result, would become the largest holder of the Company’s common stock. Concurrently with the completion of these exchanges, the Company would sell shares of common stock in a private placement to unrelated investors at a discount to the market value. You stated that the completion of each part of the Proposed Transactions is conditioned on the completion of each of the other parts. The Company plans to seek the necessary approval of the banking regulators to allow it to retain at the holding company level a substantial portion of the proceeds from the private placement and to invest the remainder in the Bank.

You stated the Company exhaustively explored possibilities to structure a transaction which would comply with the shareholder approval requirements but was unable to do so. Each participant in the Proposed Transactions demanded the contingency that all portions close concurrently. The investors in the private placement agreed to invest only if the improvements in the Company’s capital structure, which would result from the preferred stock exchanges, were certain to occur. The participants in the Proposed Transactions also insisted on full voting power and were unwilling to accept a non-voting security which would be convertible into common stock only after shareholder approval.

The Company’s financial advisory firm approached approximately 175 potential investors over the past 2 years but could not reach an agreement for another source of capital on different terms. Efforts to sell the Company in its entirety were not successful. You stated that based on these efforts, the Company believes that the Proposed Transactions are the only available alternative. In addition, you stated that if it is not able to complete the Proposed Transactions in the very near term, the Company will be forced to file for bankruptcy protection or bank regulatory authorities may appoint a receiver or conservator for the Bank.

The Company expects that as a result of the Proposed Transactions, it would avoid having to seek bankruptcy protection, and the Bank would no longer face the risk of the appointment of a receiver or conservator. In addition, the Company believes that following the closing of the Proposed Transactions it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the Company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) as the issuance could result in a change of control and pursuant to Listing Rule 5635(d) as the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the Convertible Securities would effectively have greater voting rights than the common stock since they would vote on an as-converted basis and would convert at a discount to the market value. You stated that the time that would be required to prepare for and conduct a meeting of stockholders would seriously jeopardize the Company’s continuing existence as an operating entity and that even more urgently, the Company does not have the cash that would be required to hold such a meeting.

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and the appointment of a conservator or a receiver for the Bank. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the Proposed Transactions because both that rule and former Securities and Exchange Commission Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.

This exception applies only to the Proposed Transactions and not to any other issuances of securities which you stated may occur following the completion of the Proposed Transactions.

Publication Date*: 1/17/2013 Identification Number: 1069 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-6
Identification Number
1065

This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”). In addition, you asked about the applicability of the voting rights requirements of Listing Rule 5640 and IM-5640 to the Proposed Transaction.

The Company is in the pharmaceutical industry and has invested substantially all of its efforts and financial resources into the development of a single new pharmaceutical product (the “Product”), which has not yet been approved by the Food and Drug Admiration (the “FDA”). The company expects that the FDA will complete the current stage of its review within approximately three months. The Company has not yet generated any product revenues and has funded its operations through credit facilities and the issuance of debt and equity securities. 

You stated that the Company has a working capital deficit of several million dollars and that without additional capital it is in imminent danger of being unable to meet its monthly debt service, office lease, payroll and other obligations. As part of its plan to reduce expenses, the Company has already reduced its workforce by approximately 50% and has temporarily amended its credit agreement to achieve additional liquidity. You also stated that due to the extent of the Company's payment delinquencies, certain vendors performing activities critical to the FDA’s review of the Product have informed the Company that they will cease performing services until past due payments are received. In addition, the Company faces the imminent risk of default under its secured credit facility, which could result in immediate insolvency. As such, you have stated that unless the Company can quickly complete the Proposed Transaction, it would likely have to cease operations or file for bankruptcy protection. 

You stated that over the past ten months the Company, together with its financial advisors, has unsuccessfully sought other financing sources and had discussions with over 50 prospective investors. The Company believes that its only viable alternative is the Proposed Transaction. In the Proposed Transaction, the Company would sell shares of voting preferred stock, convertible into shares of common stock, and warrants, exercisable for additional shares of common stock, to several purchasers including two current shareholders. Both the conversion price of the preferred stock and the exercise price of the warrants would be at discount to the market value of the common stock. The number of shares of common stock potentially issuable would equal approximately 65% of the Company’s outstanding shares on a post-transaction basis. The voting power of the preferred stock would be limited to that number of votes equal to the number of shares of common stock into which the preferred stock would be convertible if it were converted at market value on the date of the definitive purchase agreement. The purchasers would be entitled to appoint directors proportional with their ownership position. The number of directors they could appoint would decline proportionally with a decline in their ownership position in the Company. 

The Company expects that the Proposed Transaction would be sufficient to fund its operations for the next 12 months and that the Company would satisfy NASDAQ’s continued listing requirements throughout that time. In addition, the Company would be able support the FDA approval process for the Product. 

Without the requested exception, the Proposed Transaction would require shareholder approval pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. You stated that a delay in securing shareholder approval would seriously jeopardize the financial viability of the Company, that the purchasers in the Proposed Transaction are unwilling to structure the financing in a manner that would not require shareholder approval, and that the Company does not have sufficient cash to sustain it through a shareholders’ meeting. 

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. The exception is subject to the following: (i) the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the Company must make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible, but no later than ten days before the issuance of the securities. We note that the Proposed Transaction would comply with Listing Rule 5640 and IM-5640 and therefore does not require an exception from these requirements.

Publication Date*: 12/18/2012 Identification Number: 1065 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2012-4
Identification Number
1062

This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”). 

In the Proposed Transaction, the Company would sell to the Investor shares of preferred stock, which would be convertible into common stock at a price below the current market value.  The Preferred Stock would vote on an as-converted basis resulting in the Investor owning approximately 73% of the Company’s outstanding shares of voting stock on a post-issuance basis.  The Investor would have the right to appoint 4 members of the board of directors which would consist of no more than 7 members.  The number of directors the Investor could appoint would decline proportionally with a decline in the Investor’s ownership position in the Company.  The Investor is not currently affiliated with the Company.  

You stated that, due to a variety of circumstances, the Company is in dire financial condition.  While the Company has experienced continuous net losses for approximately fifteen years, it has been able to continue operations through issuances of common and preferred stock and debt.  Recently, the Company lost a significant customer, which last year accounted for approximately 42% of its total revenue.  Subsequent negotiations with several prospective large customers ended without any sales agreements being reached.

You explained that as its condition has continued to deteriorate, the Company has released most of its employees and has delayed or withheld payments to vendors, resulting in its inability to obtain the products and services necessary to operate its business.   The Company has debt maturing in approximately 10 months, which under the current circumstances it would be unable to repay.  In addition, approximately five months ago, a patent infringement lawsuit was filed against the Company, significantly hindering its capital raising efforts due to the inherent uncertainty regarding any possible settlement.

The Company’s investment bankers have explored strategic alternatives, including a possible sale and potential sources of capital, and in the process have contacted over forty parties.  You stated that until the Proposed Transaction, however, there has not been any viable interest.   The Company’s bankruptcy counsel has begun preparing a bankruptcy petition in the event the Company is unable to quickly raise the needed funds.

The Company believes that if it completes the Proposed Transaction it would be able to continue operations for at least twelve months, during which time it would refocus its marketing efforts to compensate for the recent loss of the significant customer and have the opportunity to grow its sales and improve its prospects.  The Company would also use the proceeds of the Proposed Transaction to settle its debt for a significantly reduced cash amount and shares of common stock.  In addition, the Company agreed to a term sheet for the settlement of the patent infringement lawsuit, which would be funded from the proceeds of the Proposed Transaction.   The Company believes that following the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement for which it is currently within the 180-day compliance period (the “Compliance Period”).   You stated that the Company would take all steps necessary, including a reverse stock split, to regain compliance with the bid-price requirement by the expiration date of the Compliance Period.  In addition, the Company did not timely file its Form 10-Q for its most recently completed quarter.   The Company has stated that it expects to file that Form 10-Q within approximately three weeks.  In the meantime, the Company issued a press release containing detailed financial information for the quarter. 

Without the requested exception, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control; and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value of the common stock, thereby effectively affording it greater voting rights than the common stock.  In addition, depending on the number of directors on the Company’s board, the Investor’s percentage representation on the board could be greater than its percentage ownership in the Company.

You stated that a delay in securing shareholder approval would seriously jeopardize the financial viability of the Company, and the Proposed Transaction is the only available means to avoid an imminent bankruptcy filing.  You added that the Company’s current cash position is not sufficient to sustain it through the time that it would take to obtain shareholder approval.

Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules.   This determination is based on your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy.  In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Securities and Exchange Commission Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress.  The exception is subject to the following:  (i) the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the Company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.  

As an additional matter, you indicated that the Company is considering an investment in a company which is in a related business.  The exception granted herein does not apply to such investment, which would be fully subject to the shareholder approval requirements.  In that regard, you stated that the Company would not use any of the proceeds from the Proposed Transaction to fund the investment without the prior approval of its shareholders other than the Investor. 

Publication Date*: 11/30/2012 Identification Number: 1062 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2011-5  
Identification Number
695
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) (the “Rule”) with respect to a proposed issuance of convertible notes and convertible preferred stock (collectively, the “Securities”) in connection with the company’s financial restructuring (the “Restructuring”). Approximately 18 months ago, we granted an exception (the “Prior Exception”) under the Rule in connection with an issuance of common and preferred stock in exchange for outstanding debt (the “Debt Exchange”). For the reasons described below, we are unable to grant the currently requested exception.
 
The company provides freight transportation services. You stated that beginning approximately three years ago, the economic environment has had a substantial detrimental effect on the industry and the company, negatively impacting customers’ needs to ship and, therefore, negatively impacting the volume of freight the company ships and the prices it receives for its services. Although market conditions rebounded last year, the company believes it will continue to face operational issues stemming from excess capacity in the industry. It continues to experience declining revenue, operating losses, and net losses.
 
You stated that the company retains substantial indebtedness under additional notes it issued to retire debt securities still outstanding after the Debt Exchange, under its credit facilities, and under an agreement with its employees’ labor union (the “Union”) relating to its pension fund contributions. Although the company has entered into deferral agreements with its lenders, creditors, and the Union, you stated that a failure to complete the Restructuring within approximately six weeks could trigger events leading to the company’s liquidation. Upon such failure, you expect that the amounts deferred would become immediately payable, the creditors would declare an event of default causing cross-defaults under other agreements, and the Union would revoke previous wage and benefit concessions. You stated that as a result, the company would most likely need to seek protection under the United States Bankruptcy Code. The company expects that if it were to complete the Restructuring within the six-week timeframe, it would have sufficient liquidity to continue as a going concern and would not have to file for bankruptcy protection.
 
In the Restructuring, the company would issue the Securities at a discount to market value to its creditors, lenders, and the Union under agreements which would release the company from its obligations under existing credit agreements and satisfy the demands of its lenders and the Union. Following the Restructuring, the holders of the Securities would own approximately 97.5% of the company’s common stock on an as-converted basis, with the company’s existing shareholders owning the remaining approximately 2.5%. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance could result in a change of control and pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
 
Based on our review of the circumstances described in your correspondence, we have determined not to grant the requested exception. Under Listing Rule 5635(f), the financial viability exception may be available “when a delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise” and certain other specified criteria are satisfied. While the company may have presented a compelling case as to its financial distress, we are not convinced that the company did not have the time to secure the required stockholder approval. In that regard, according to its filings made with the Securities and Exchange Commission, at least nine months ago the company already expected that it would have to restructure its financial obligations. Moreover, agreements in principle relating to the Restructuring were reached more than four months ago and definitive agreements were reached approximately two months ago. NASDAQ Staff has had discussions with the company during this period about the company’s need for a transaction like the Restructuring and about its noncompliance with certain listing requirements.
 
In addition, we are troubled that this is the company’s second request for an exception under the Rule in a short period. While the Rule does not preclude such a request, it is now clear that the transactions completed pursuant to the Prior Exception did not restore the company’s financial viability, and it remains unclear whether the Restructuring would restore its viability. Our concerns are exacerbated by the massive dilution of current shareholders’ interest, which would occur as a result of the Restructuring. The financial viability exception is meant to preserve some value for a company’s existing shareholders when the alternative is the likely failure of the company. However, in this case the existing shareholders’ interest would be essentially eliminated following the Restructuring.
 
 
 
Publication Date*: 7/31/2012 Identification Number: 695 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-19
Identification Number
718
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).
 
The facts of the matter as they have been submitted to us, and upon which we have based our consideration of this issue, are summarized below.
 
The company, a bank holding company, conducts banking operations through its principal operating subsidiary (the “Bank”). The Bank (and, consequently, the company) has been severely affected by economic conditions and has been particularly exposed to the downturn in the real estate market. As a result, the company experienced substantial losses from continuing operations for its most recently completed fiscal year and in each quarter of the current year. The losses were due largely to impairment charges on certain of the Bank’s mortgage-backed securities and other non-performing assets as well as provisions for credit losses and loan-principal write-downs.
 
Due to its weakened financial status, the Bank has experienced a decline in deposits, and it believes that unless it resolves its difficulties in the near-term, additional depositors may move their funds elsewhere, further weakening the financial condition of both the company and the Bank. In addition, the company has been forced to suspend interest payments on its outstanding trust preferred securities, and it is in default of its credit agreement.
 
The cumulative effect has been to erode the company’s equity account and to materially and adversely affect the Bank’s compliance with applicable banking regulations. Consequently, pursuant to Cease and Desist Orders (the “Orders”), the banking regulators have imposed stringent enforcement actions requiring the company and the Bank to raise additional capital in the near-term or else face additional regulatory actions. Thus far the company has been unable to raise the amount of capital required under the Orders, and as a result, the Bank is not in compliance with certain provisions of the Orders. The company also expects that at the end of the current year, the Bank will fall below the level required to be adequately capitalized, absent the Proposed Transaction. As a result, the Bank would be unable to hold certain deposits (that currently account for over 75% of its total deposits) and would face a liquidity crisis that it believes would lead to the regulator recommending the seizure of the Bank, resulting in the liquidation of the company. The company believes that the Proposed Transaction is the only viable option available to it.
 
You stated that the Proposed Transaction is the result of an extensive process pursuant to which the company’s investment banking advisers conducted over 30 meetings with potential investors. In the Proposed Transaction, the company would issue shares of common stock and warrants exercisable for additional shares. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) as the issuance could result in a change of control and pursuant to Listing Rule 5635(d) as the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
 
The company expects that as a result of the Proposed Transaction, it would satisfy the applicable banking regulatory requirements and would no longer face the prospect of the Bank being seized or the company being liquidated.  In addition, the company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
The company believes that it does not have the time or the ability to withstand the delay in consummating the Proposed Transaction that would result from seeking shareholder approval and that without the requested exception, its ongoing prospects would be dire, leading the company to file for protection under the federal bankruptcy laws and probably resulting in a total loss to the company’s shareholders.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined that NASDAQ should grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the company needs to quickly proceed with the Proposed Transaction to avoid the seizure of the Bank and the possible liquidation of the company.  In order to rely upon this exception, the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
 
 
Publication Date*: 7/31/2012 Identification Number: 718 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-15
Identification Number
714
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”). In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”).
 
The company, a bank holding company, conducts banking operations through its wholly-owned subsidiary (the “Bank”) and has minimal assets beyond its ownership of the Bank. You stated that over the past three years, the Bank (and, consequently, the company) has been severely affected by economic conditions and has been particularly exposed to the downturn in the real estate market, suffering a high level of delinquencies on its outstanding loans. As a result, the company has experienced significant losses, severely impacting its capital and liquidity positions, and it continues to project significant charge-offs and operating losses due to losses in its loan portfolio. The company has instituted cash conservation measures including deferring interest payments on its outstanding trust preferred securities and suspending dividends on its outstanding preferred stock but, nevertheless, expects to have only “nominal” cash within 45 days unless it is able to raise additional capital. You stated that unless the company can resolve its financial difficulties, the Bank faces the potential for the withdrawal of significant customer deposits which could trigger a “run on the bank.” The company’s financial condition makes it more difficult to retain vendor and other contracts necessary to serve customers and thereby avoid customer flight which would further harm the company.
 
The losses and declining capital position have resulted in stringent enforcement actions by the applicable banking regulators requiring the company and the Bank to raise additional capital in the near-term or else face additional regulatory actions which could include seizure of the Bank and result in the bankruptcy of the company. Over the past several months, the company has attempted to resolve its regulatory problems and improve its capital position through the unsuccessful pursuit of possible financing alternatives. The company abandoned a planned public offering due to market considerations on the advice of its investment banking firm, and it has experienced increasing difficulty attracting outside sources of capital as its financial condition has continued to deteriorate.  
 
In the Proposed Transaction, the company would issue to the Investor shares of common stock, convertible preferred stock, and a warrant exercisable for additional shares during the 18-month period following closing. The securities would be issued, convertible, or exercisable at a discount to the market value of the company’s common stock at the time the Proposed Transaction is consummated. The preferred stock would vote on an as-converted basis.
 
The company expects that as a result of the Proposed Transaction, it would satisfy the applicable banking regulatory requirements and would no longer face the prospect of the Bank being seized or having to file for bankruptcy.  In addition, the company believes that following the closing of the Proposed Transaction, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance would result in a change of control and pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in its effectively having greater voting rights than the common stock.
 
You stated that the delay resulting from securing shareholder approval would seriously jeopardize the financial viability of the company and that the Proposed Transaction is its only available means to avoid the possibility of regulatory consequences that would likely result in the seizure of the Bank and a bankruptcy filing by the company. In addition, you stated that the company has been unable to structure a transaction that complies with the shareholder approval requirements and that the Investor demanded full voting rights, on an as-converted basis, as a condition into entering into the Proposed Transaction.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid the seizure of the Bank and the company’s declaring bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) the company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 714 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-14
Identification Number
713
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed issuance of securities (the “Proposed Transaction”).  In addition, you asked for a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to the Investor’s proposed voting power (the “Voting Power”) and board representation.
 
In the Proposed Transaction, the company would sell shares of non-convertible preferred stock and warrants to the Investor for cash.  The warrant exercise price would equal the closing bid price of the common stock immediately prior to entering into the definitive agreement for the Proposed Transaction, and the number of shares of common stock that could be issued upon exercise of the warrants would exceed the number of currently outstanding shares.  Shareholder approval would otherwise be required pursuant to Listing Rule 5635(b) because the issuance would result in a change of control.
 
The Voting Power of the Investor would be based on the dollar value of the investment, as a percentage of the company’s overall market value immediately post-transaction, not to exceed 45% of the votes outstanding.  The Investor would also have the right to designate 25% of the company’s board of directors upon closing.  If the Investor’s ownership position were thereafter to decline to below 25%, the number of directors so appointed would decline such that the percentage of the board that it could appoint would remain approximately equal to its declining percentage ownership interest in the company.  Below 7.5% ownership, the Investor’s right to designate a director would be eliminated.
 
You have indicated that the company is in dire financial condition as a result of a variety of factors, including criminal activity by former executives, earnings restatements and the overall decline in commodity prices, and that as a result, the company is over-leveraged and facing imminent default under its subsidiaries’ credit facilities.  For more than a year, the company attempted unsuccessfully to restructure its credit facilities and raise needed capital.  Pursuant to the terms of those credit facilities, only cash on hand in a subsidiary can be used to repay that subsidiary’s debt.   In that regard, you have advised that the credit facility of one subsidiary matures in approximately one week, requiring a lump-sum payment of approximately $20 million.  The subsidiary, however, has less than $2 million in available cash.   The company expects that a default on that credit facility would lead to cross-defaults on other subsidiary credit agreements.
 
Without the Proposed Transaction, the company has no way to cure the impending defaults, or to restructure its debt, so that its only available option would be to file for bankruptcy protection.  However, the company’s lenders have agreed to a restructuring of the outstanding debt, contingent on the closing of the Proposed Transaction, which would reduce the interest rate, and provide the company one year until the next debt-reduction payment would be due.  The company thus expects that the Proposed Transaction would resolve its short-term financial issues and ensure its long-term financial viability.  In addition, the Investor has committed to make additional funds available to the company, as needed, for 18 months following the closing of the Proposed Transaction.  The company expects that, following the closing, it will remain in compliance with all of NASDAQ’s continued listing requirements.
 
You have also advised us that the company was unable to structure the Proposed Transaction such that it would not require shareholder approval.  The company also explored with the Investor the possibility of limiting the issuance of warrants to 19.9% of the pre-transaction outstanding shares and then obtaining shareholder approval for the remainder of the issuance, but the Investor rejected that approach.  In any event, the amount of any correspondingly smaller initial investment would not be adequate either to satisfy the lenders or to sustain the company for the time that it would take to seek shareholder approval.
 
Based on the foregoing, we have determined to grant the requested exception to the shareholder approval rules.  This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid declaring bankruptcy.  This exception is subject to the following conditions:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required to be in the letter as promptly as possible, but no later than ten days before the issuance of the securities.
 
With respect to the Voting Rights Rule, we have determined that no exception is necessary because the Voting Power would be consistent with the Investor’s ownership position in the company, as would the board designation rights.
 
Publication Date*: 7/31/2012 Identification Number: 713 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-12
Identification Number
711
This is in response to your correspondence requesting certain exceptions from NASDAQ Rules. Specifically, the company is requesting an exception from NASDAQ’s shareholder approval requirements under Listing Rule 5635(f), as well as a related exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), both with respect to a proposed issuance of preferred stock (the “Preferred Stock”). The Acquirer would acquire the Preferred Stock in order to influence the outcome of an upcoming vote of the company’s shareholders to approve the proposed merger of the company with a wholly-owned subsidiary of the Acquirer (the “Acquisition”). The company is a bank holding company, and its primary subsidiary is a commercial bank (the “Bank”).  For the reasons described below, we are unable to grant the requested exceptions.
 
You stated that the financial condition of the Bank (and consequently the company) has severely deteriorated. The company has experienced substantial losses over the past two years and continues to project substantial losses on a going forward basis; the company’s and the Bank’s credit ratings have been downgraded by all rating agencies to “junk” status; the Bank is not in compliance with mandatory banking regulatory capital ratios; and the applicable federal banking regulators have instituted enforcement actions that make it necessary for the company to raise a significant amount of capital within a limited period of time. Failure to raise the necessary capital would result in additional regulatory actions, which could include seizure of the Bank. You indicated that the company’s attempts to raise the required capital have failed and that the company is left with no practical alternative to the Acquisition.
 
Pursuant to the Acquisition agreement, the company’s common shareholders would be able to elect to receive either cash or shares of the Acquirer’s common stock in exchange for their shares of the company’s common stock.  In addition, the United States Department of the Treasury has agreed to sell to the Acquirer, at a discount, company securities that the Treasury previously purchased as part of its Capital Purchase Program. The closing of the Acquisition is subject to the approval of the company’s shareholders, and it is contemplated by the parties that the Acquirer would have the ability to vote its newly acquired shares of Preferred Stock in favor of the Acquisition. The Preferred Stock would represent 39.9% of the voting power of the company. As consideration for the Preferred Stock, the company would receive 1,000 shares of the Acquirer’s common stock, which, based on current prices, has a value of approximately $70,000.
 
You indicated that the Acquirer sought the Preferred Stock as a way to reduce the uncertainty regarding the outcome of the company's shareholder vote on the Acquisition. You suggested that reducing the uncertainty surrounding the vote would also help address regulators’ and depositors’ concerns about the Bank. You advised that if the company does not receive the requested exceptions, the Acquirer would have the contractual right to terminate the agreement with the company and not proceed with the Acquisition.
 
Without the requested exceptions, the issuance of the Preferred Stock would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance would result in a change of control and pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction voting power at a price less than the greater of book or market value. Additionally, without the requested exceptions, the issuance of the Preferred Stock would violate the Voting Rights Rule because the voting power of the Preferred Stock would be disproportionally high relative to the dollar value of the Acquirer’s investment.
 
Based on our review of the circumstances described in your correspondence, we have determined not to grant the requested exceptions. We have made this determination because we do not believe that the proposed issuance of the Preferred Stock meets the specific requirements of Listing Rule 5635(f), which you cited as the basis for your request.
 
Under Listing Rule 5635(f), the financial viability exception may be available “when a delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise” and certain other specified criteria are satisfied. Thus, in a typical situation, relief under this rule is granted in anticipation of a capital-raising transaction when a company might not survive financially if the transaction to provide the needed capital were to be delayed long enough to allow the company to hold a shareholder vote.
 
The facts here are fundamentally different. The company would need to solicit shareholder approval of the Acquisition and would not receive material new capital before such vote is held even if the financial viability exception were to be granted with respect to the Preferred Stock issuance. While the company may have presented a compelling case as to its financial distress, its financial position would not improve until the Acquisition closed because the company would raise only a nominal amount of capital through the issuance of the Preferred Stock.
 
Given these facts, we conclude that “the delay in securing stockholder approval” for the Preferred Stock would not by itself “jeopardize the financial viability of the company. [See Listing Rule 5635(f)]. This is the case because eliminating such a delay with respect to the Preferred Stock issuance would neither accelerate the availability of needed capital nor advance in time the proposed ultimate resolution of the company’s difficulties. At the same time, the understandable desire of the Acquirer to achieve greater certainty with respect to the outcome of the shareholder vote on the Acquisition or to influence such outcome is not an acceptable basis for an exception under Listing Rule 5635(f). Accordingly, it would not be appropriate to grant a financial viability exception on these facts, and issuing the Preferred Stock without obtaining shareholder approval would violate the Rules. For the same reasons, we do not believe it is appropriate to grant an exception to the Voting Rights Rules for the issuance of the Preferred Stock.
 
Publication Date*: 7/31/2012 Identification Number: 711 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-11  
Identification Number
710
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from the shareholder approval requirements and from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) with respect to the proposed transactions described below (the “Proposed Transactions”).
 
According to the information you provided, in the Proposed Transactions the company would: (i) issue shares of common stock and convertible preferred stock to the Investor in a private placement (the “Investment”); and (ii) issue shares of common stock and/or convertible preferred stock to the United States Department of Treasury (the “Treasury”) in exchange for shares of the company’s non-convertible preferred stock currently held by the Treasury (the “Treasury Exchange”).  The issuance price of the common stock and the conversion price of the preferred stock both would be less than the market value of the common stock, and the convertible preferred stock would vote on an as-converted basis. You stated that the Treasury Exchange is a condition precedent to the Investment.
 
You indicated that the company is a bank holding company, and its subsidiary is a nationally chartered bank (the “Bank”). The Bank has been drastically impacted by economic deterioration in the markets its serves and by declining asset quality, and the company, therefore, has experienced significant losses and projects substantial additional losses going forward. As a result, the Bank is not in compliance with mandated regulatory capital ratios, and the applicable federal banking regulators have implemented enforcement actions, which resulted in the company and the Bank entering into agreements with those regulators requiring them to increase their leverage and capital ratios. In order to satisfy these agreements, the company must raise a significant amount of capital within a limited amount of time. The agreements also provide that if the company fails to meet the prescribed capital ratios within the prescribed timeframes, it must submit a plan to sell, merge or liquidate the Bank, which you stated would likely result in a complete loss to the company’s shareholders, or face additional regulatory action having the same effect. Recently, several rating agencies have downgraded the company’s credit ratings and the Bank’s deposit ratings.
 
You stated that over the past several months, the company unsuccessfully attempted to develop other capital raising opportunities or identify a merger partner. Despite these efforts, which resulted in several dozen prospective counterparties entering into confidentiality agreements and conducting due diligence, the company has been unable to generate any firm proposal other than the Proposed Transactions. The company believes that the Proposed Transactions are its only available means of addressing its capital needs within the timeframe available and that the delay in seeking shareholder approval could result in it having to seek bankruptcy protection. In that regard, you stated that there is a very high risk of depositor attrition, and the attendant risk of near-term regulatory action against the company, resulting from the delay and uncertainty associated with obtaining shareholder approval. With respect to voting rights of the preferred stock, the company believes that such rights are consistent with an investor’s reasonable expectations for protection of its investment in the context of this type of transaction.
 
The company expects that as a result of the Proposed Transactions it would satisfy the banking regulatory requirements and would no longer face the prospect of having to liquidate or file for bankruptcy. In addition, the company believes that following the consummation of the Proposed Transactions, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
Without the requested exceptions, the Proposed Transactions would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance would result in a change of control and Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in its effectively having greater voting rights than the common stock.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transactions to avoid additional regulatory actions and the loss of additional deposits, either of which could lead to the company’s declaring bankruptcy or facing regulatory action having the same effect. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) the company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 710 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2010-8  
Identification Number
707
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from the shareholder approval requirements and from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”) with respect to the proposed transactions described below (the “Proposed Transactions”).
 
According to the information you provided, in the Proposed Transactions the company would: (i) sell shares of convertible preferred stock to institutional investors; (ii) issue shares of convertible preferred stock to the United States Department of Treasury (the “Treasury”) in exchange for shares of the company’s non-convertible preferred stock currently held by the Treasury; (iii) change the exercise price of an existing warrant held by the Treasury to purchase common stock; and (iv) potentially, pay a fee to the Treasury in shares of the company’s common stock in connection with the exchange. The preferred stock would be convertible into common stock at a conversion price that would be less than the market value of the common stock and would vote on an as-converted basis. You stated that each component of the Proposed Transactions is conditioned upon the substantially concurrent consummation of each of the other components.
 
You indicated that the company, a bank holding company, faces challenges resulting from current and prior year losses, driven by credit quality issues, and is categorized as being under-capitalized under applicable banking regulatory guidelines. You further stated the company has been adversely impacted by severe declines in housing prices and property values in its primary market areas as approximately 75% of its loan portfolio is secured by real estate. The company has experienced increased loan delinquencies and foreclosures and decreased demand for its products and services. The company incurred significant losses over the last five quarters, and it began deferring interest payments on its outstanding trust preferred securities approximately six months ago. The company’s principal banking subsidiary (the “Subsidiary”) is currently in default under an agreement with its primary banking regulators to raise additional capital.  The company has been informed by the Federal Deposit Insurance Corporation (the “FDIC”) that if it does not raise capital in the very short term, the FDIC will place the Subsidiary into receivership. You stated that such receivership would result in the company’s becoming insolvent and filing for bankruptcy.
 
You also stated that for so long as uncertainty as to its financial viability continues, the company risks negative impact on its ability to attract new deposits and faces the possibility of additional deposit outflows. In addition, the company expects to face increasing drains on its liquidity over the next three to six weeks as a result of limitations imposed under agreements with its banking regulators.
 
The company expects that as a result of the Proposed Transactions, it would satisfy the banking regulatory guidelines applicable to both the company and the Subsidiary, and would no longer face the prospect of having to file for bankruptcy. In addition, the company believes that for at least one year following consummation of the Proposed Transactions, it would meet the requirements for continued listing on NASDAQ with the possible exception of the bid price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
Without the requested exceptions, the Proposed Transactions would require shareholder approval pursuant to Listing Rule 5635(b) because the issuance could result in a change of control and Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transactions would not comply with the Voting Rights Rule because the preferred stock would vote on an as-converted basis and would convert at a discount to the market value, resulting in it effectively having greater voting rights than the common stock.
 
You stated that the company is unable to structure a transaction that would satisfy NASDAQ’s shareholder approval and voting rights requirements, in large part because of the amount of capital it needs to raise to meet the regulatory capital requirements. In addition, you stated that the company believes that the Proposed Transactions may be its final opportunity to raise the capital necessary to successfully address its difficulties and that the delay in seeking shareholder approval could result in it having to seek bankruptcy protection.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transactions to avoid the FDIC placing the Subsidiary into receivership and the company declaring bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former SEC Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. These exceptions are subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transactions and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on these exceptions; and (iii) the company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required to be in the letter as promptly as possible but no later than ten days before the issuance of the securities.
 
 
Publication Date*: 7/31/2012 Identification Number: 707 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-27
Identification Number
745
This is in response to your correspondence requesting: (i) an exception under Listing Rule 5635(f) from the shareholder approval requirements, and (ii) an exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue shares of its common stock and convertible preferred stock in exchange for certain of its outstanding debt securities (the “Notes”). The issuance price of the common stock, and the conversion price of the preferred stock, would be less than the market value of the common stock. The preferred stock would vote on an as-converted basis. The holders of the Notes (the “Noteholders”) do not include any officers or directors of the company.
 
The company provides freight transportation services. You stated that the overall economic conditions and credit crisis beginning last year have had a significant detrimental impact on the company’s financial condition and continue to negatively impact its customers’ needs to ship goods which, in turn, causes a reduction in the volume of freight the company ships and in the price it receives for its services. In addition, shipping volumes have declined as a result of customers’ switching to other carriers due to their concerns regarding the company’s financial stability. For each of its most recently completed two fiscal quarters, the company’s operating revenues were down approximately 50% compared to the year-earlier periods. The company continues to experience reduced revenue, operating losses, and negative cash flow, and did not make the most recently due interest payment on the Notes. As a result of its financial condition, the company is restricted from accessing a significant portion of its revolving credit facility (the “Credit Facility”).
 
You stated that the Proposed Transaction is a necessary step for the company to address its near-term liquidity issues and to stabilize its financial condition. Subject to the completion of the Proposed Transaction, the company’s lenders under the Credit Facility have agreed to allow the company to defer the payment of interest and fees otherwise due (the “Deferral”). After the completion of the Proposed Transaction, and subject to compliance with certain borrowing conditions, the lenders will allow the company to again access the blocked portion of the Credit Facility. In addition, the company has obtained significant concessions from its unionized employees who have agreed to wage reductions and to allow the company to defer contributions to pension funds (the “Concessions”). You stated that the Concessions are essential to the company’s remaining a going concern, and the continuation of the Concessions is contingent on the completion of the Proposed Transaction in the near-term. Other measures the company has taken include the consolidation of operations and the sale of excess property and equipment.
 
Without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control; and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common stock because it would vote on an as-converted basis and would convert at a discount to the market value.
 
You stated that the delay in securing shareholder approval would seriously jeopardize the company’s financial viability and that unless the Proposed Transaction is completed within approximately three weeks, the company will likely file for bankruptcy. The company does not have cash sufficient to sustain it for the time that it would take to get shareholder approval of the Proposed Transaction. Moreover, the Noteholders were unwilling to enter into a transaction that would satisfy the shareholder approval and voting rights requirements.
 
The company believes that if it completes the Proposed Transaction, it will have sufficient liquidity to continue in business as a going concern and to continue operations for at least approximately nine months. The company expects that the benefits of the Proposed Transaction, which include the Deferral, the Concessions, and the availability of the Credit Facility, as well as the elimination of future interest payments associated with the Notes, will further improve the company’s liquidity position and overall financial condition. In addition, the company believes that following the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company plans to complete a reverse stock split, if necessary, at a ratio sufficient to comply with that requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. The exception is subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 745 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-26
Identification Number
744
This is in response to your correspondence requesting: (i) an exception under Listing Rule 5635(f) from the shareholder approval requirements, and (ii) an exception from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue to the Investor: (i) preferred stock convertible into common stock, (ii) warrants exercisable for additional common shares, and (iii) a non-convertible senior secured note. The conversion price of the preferred stock and the exercise price of the warrants would be at a discount to the market value of the common stock. The preferred stock would vote on an as-converted basis. As a condition to closing, the Investor requires that members of the company’s management (the “Insiders”) purchase securities in the Proposed Transaction.
 
You stated that for the past several years the company has experienced net losses and negative working capital as its current liabilities have exceeded its current assets. The company has been able to operate under these conditions due primarily to advance payments made to it by its largest customer (the “Customer”) and to a credit facility (the “Credit Facility”) provided by a bank (the “Bank”).  Both of these arrangements, however, recently changed in ways detrimental to the company.  Approximately four months ago, the Customer notified the company that it was reducing the amount of business it does with the company and, as a result, would require the company to repay a significant amount in advance billings.  The company had not anticipated this business reduction or the repayment requirement because it was unprecedented over the course of a long relationship with the Customer. In addition, approximately six months ago, the Bank suspended the Credit Facility as a result of the company’s failure to comply with various covenants.
 
You stated that as a result of the foregoing factors, the company is currently in severe financial distress and has been required to delay substantial payments past due to its clients and vendors, negatively impacting the company's business and its ability to generate revenues. On several recent occasions, the company was able to meet its payroll obligations only after the receipt of funds from clients within 24 hours of the time such obligations were due. Currently, the amount of the company’s accounts payable exceeds its available cash.
 
Approximately six months ago, the company began considering various financing alternatives and believed that it would be able to raise sufficient funds in a transaction that would not require shareholder approval. As its financial condition continued to deteriorate, however, the company concluded that it would need to raise more funds than would be provided by the transactions then under consideration. As a result, the company entered into negotiations with the Investor leading to the Proposed Transaction. The Investor was unwilling to enter into a transaction that would satisfy the shareholder approval and voting rights requirements.
 
Without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control; (ii) Listing Rule 5635(c) because the issuance at a discount to the Insiders would be considered equity compensation; and (iii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common stock because it would vote on an as-converted basis and would convert at a discount to the market value.
 
You stated that the company has concluded that a delay in closing the Proposed Transaction to secure shareholder approval would seriously jeopardize its financial viability. The company believes that if it does not consummate the Proposed Transaction as soon as possible, its financial position will continue to deteriorate and it will be unable to meet its current obligations, resulting in the company being forced to cease all or a substantial portion of its operations and/or file for bankruptcy.
 
The company believes that if it is able to consummate the Proposed Transaction, its working capital deficit would be significantly reduced immediately and then eliminated within approximately five months as a result of projected earnings. In addition, the company believes that following the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and that the Insiders did not negotiate the terms of the Proposed Transaction and are participating only at the insistence of the lead investor and on the same terms as that investor. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Rule 19c-4 permit such an exception where necessary to rescue a company in financial distress. The exception is subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 744 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-24
Identification Number
742
This is in response to your correspondence requesting an exception from the shareholder approval requirements under Listing Rule 5635(f) with respect to a proposed transaction (the “Proposed Transaction”). According to the information you provided, in the Proposed Transaction the company would issue shares of its common stock, and warrants exercisable for additional shares, to its primary lender (the “Lender”) as part of a restructuring of the company’s debt held by the Lender (the “Debt”).
 
You stated that the company has recently experienced significant losses and cash flow deficits and that as a result its current financial position is precarious and its operational viability is uncertain. Over the past year, the unfavorable conditions of the global financial and credit markets have negatively impacted the company’s business leading to repeated defaults by the company on certain covenants of the Debt, thereby triggering higher interest rates on the Debt, which the company is no longer able to cover. Additionally, the company is experiencing difficulties with certain of its vendors who are requiring prepayments or significantly reducing credit terms and limits, thereby inhibiting the company’s ability to keep its supply lines open. To conserve cash, the company has reduced its workforce, limited business travel, reduced the payment of fees to members of its board of directors, suspended most of its marketing programs, and refocused its business on productive customers in lieu of under-performing accounts.  You stated that notwithstanding these efforts, without the Proposed Transaction the company will run out of cash in the next few weeks and would face almost certain insolvency and a likely bankruptcy. The company has already retained bankruptcy counsel.
 
Over the past eight months, the company has unsuccessfully sought additional financing utilizing the services of two investment banking firms.  The company believes that such efforts failed because potential investors were unwilling to invest in the company given the defaults on the covenants of the Debt. As a result, the company entered into negotiations with the Lender leading to the Proposed Transaction. In the Proposed Transaction, a portion of the Debt would be converted into equity, and the terms on the remaining debt would be amended to be more favorable to the company, thereby reducing its monthly interest obligations. In addition, as a result of the Proposed Transaction, the company would have increased cash available under a credit line agreement with the Lender.
 
Without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control; and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. You stated that the Lender was unwilling to enter into a transaction that would satisfy the shareholder approval requirements. Moreover, you stated that the company’s current cash is not sufficient to sustain it through the time that it would take to secure shareholder approval.  As a result, you stated that the company has concluded that the Proposed Transaction is the only alternative available in the timeframe necessary to avoid a shut-down of the business.
 
The company expects that the Proposed Transaction will enable it to fund operations at least through the third quarter of its next fiscal year, at which time the company expects to have positive cash flows from its business operations. The company believes that it will meet the requirements for continued listing on NASDAQ upon closing of the Proposed Transaction and over the long term. You stated that the company was prepared to effect a reverse stock split to maintain compliance with the bid price requirement, if necessary.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception to the shareholder approval rule.  This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
Publication Date*: 7/31/2012 Identification Number: 742 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-23
Identification Number
741
This is in response to your correspondence wherein you asked that the company be granted an exception from the shareholder approval requirements pursuant to Listing Rule 5635(f) for a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue shares of common stock and warrants exercisable for additional shares in exchange for indebtedness (the “Outstanding Debt”) owed by the company to a lender (the “Lender”).  Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control, and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.  In connection with the Proposed Transaction, the lender also would provide collateral support for a loan from a financial institution, which would be funded at the closing of the Proposed Transaction (the “Loan”).
 
You stated that the company is unable to meet its current obligations, that its short-term liabilities are approximately four times the amount of its cash and cash equivalents, and that the company would have been forced to have sought bankruptcy protection already if not for the forbearance of certain of its vendors.  You also stated that if the company delays the Proposed Transaction for the time necessary to seek shareholder approval, it would likely be forced to seek bankruptcy protection and that the Proposed Transaction is its last available alternative to secure financing before it must seek such protection.
 
You stated that unfavorable global economic conditions have created liquidity problems for certain of the company’s customers, which has caused them to default on their commitments to the company under long-term contracts.  In addition, the company has been unable to secure additional contracts due to a significant decline in the market price of the company’s primary product.  Finally, you noted that the company was negotiating a transaction whereby it would be acquired, which recently unexpectedly fell through.
 
The company believes the Proposed Transaction would solve its financial troubles.  The company would be relieved of the obligation, which it would be unable to meet, to repay in cash the Outstanding Debt upon maturity.  The Loan would provide sufficient liquidity to pay down past due accounts payable thereby enabling the company to avoid immediate foreclosure and bankruptcy and deliver on the significant contracts it already has in place.  The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement.  In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with that requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception.  This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy.  The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must  make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 741 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-22
Identification Number
740
This is in response to your correspondence wherein you asked that the company be granted an exception from the shareholder approval requirements pursuant to Listing Rule 5635(f) for a proposed transaction (the “Proposed Transaction”).
 
According to the information you provided, in the Proposed Transaction the company would issue shares of common stock to multiple investors. Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 5635(b) because the issuance could result in a change of control, and (ii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
 
You stated that without the Proposed Transaction, the company would run nearly out of cash in approximately two weeks and, as a result, would face almost certain insolvency and a likely bankruptcy filing. You stated that the company’s predicament is attributable to several factors including significant losses and cash flow deficits in recent years and the recent conditions of the global financial and credit markets, which have made it difficult for the company to obtain additional loans. The company’s lead secured lender has suspended an expansion of the company’s line of credit but retained its interest in the company collateral.  As a result, the company does not have sufficient unencumbered collateral to enter into an arrangement with any replacement lender. You further stated that the sharp decline in discretionary consumer spending has also contributed to the company’s financial struggles and has negatively impacted its financial performance. As a result of its difficulties, the company has become significantly behind in its payments to its vendors. Without the Proposed Transaction, the company may be forced to default on the principal and interest due to its primary lender in approximately two weeks, and such a default would trigger a cross-default on the company’s obligations to another lender. To conserve cash, the company has consolidated operations and reduced its workforce.
 
The company believes the Proposed Transaction would raise capital sufficient to provide for its financial rescue, funding its ongoing operations and enabling it to meet its obligations to its lenders and vendors. The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with that requirement. You stated that the investors in the Proposed Transaction were not willing to enter into a transaction that would comply with the shareholder approval requirements and that the company unsuccessfully attempted to obtain alternative sources of funding.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the requested exception. This determination is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid insolvency. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must  make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 740 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-17
Identification Number
735
This is in response to your correspondence requesting: (i) an exemption under Listing Rule 5635(f) from NASDAQ’s shareholder approval requirements and (ii) an exemption from the voting rights requirements of Listing Rule 5640 and IM-5640 (collectively, the “Voting Rights Rule”), with respect to a proposed transaction (“Proposed Transaction”).  The company is a provider of investment banking and brokerage services.
 
According to the information you provided, the company proposes to issue to multiple investors (the “Investors”) preferred stock convertible into shares of the company’s common stock and warrants exercisable for additional common shares. Approximately 90% of the securities would be purchased by persons or entities not currently affiliated with the company. The remainder would be purchased by officers, directors, or employees of the company (the “Insiders”) who would be participating in the Proposed Transaction as a condition imposed by the lead outside investor and on the same terms as all other Investors. The purchase price would be a price less than the greater of book or market value, and the number of common shares that could be issued upon conversion and exercise exceeds 20% of the pre-transaction outstanding shares.
 
As such, without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control; (ii) Listing Rule 5635(c) because the issuance at a discount to the Insiders would be considered equity compensation; and (iii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common shares as, although it would vote on an as-converted basis, it would convert at a discount to the market value.
 
According to the information you submitted, the severity of the company’s current financial situation is largely a result of litigation brought against it in connection with the activities of a former client and a former employee of the company (the “Litigation”). The company has spent several million dollars in legal fees over the past year in connection with the Litigation and recently entered into a tentative settlement with the litigants for an amount equal to approximately 75% of the amount of its most recently reported stockholders’ equity. The company believes that a binding settlement agreement cannot be reached unless the company has access to the funds that would be raised in the Proposed Transaction. The proceeds from the Proposed Transaction would be used to provide funds for the settlement and to inject funds into the company’s operations.
 
You have also indicated that the company is operating in a challenging economic environment. The financial impact of these problems has made it difficult for the company’s broker-dealer subsidiary, which comprises substantially all of the company’s revenues, to remain in compliance with the FINRA minimum net capital requirements. Non-compliance with these requirements could result in FINRA forcing the company to cease operations.
 
While the company has maintained operations over the past few months through a series of bridge financings, it believes that the Proposed Transaction will provide sufficient funding for the settlement of the litigation and its continued operations. The company’s management believes that without the Proposed Transaction, the company may be forced to dissolve in the near future, and the stockholders likely would receive nothing in such dissolution. The company has unsuccessfully explored alternative financings including structures that would satisfy the shareholder approval requirements.
 
With respect to the participation of the Insiders, you stated that the lead investor is not willing to invest unless such Insiders also participate and that such a refusal would likely preclude a successful consummation of the Proposed Transaction. The terms of the transaction were negotiated with the lead investor, and the Insiders are required to accept the same terms. With respect to the voting power of the preferred stock, you stated that all of the terms of the securities were heavily negotiated with the lead investor and that the company believes that the Proposed Transaction represents the best available option for achieving value for its stockholders and, thus, is in the best interest of stockholders.
 
In the Proposed Transaction, the company expects to raise sufficient capital to continue operating. The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with that requirement.
 
 
Publication Date*: 7/31/2012 Identification Number: 735 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-14
Identification Number
732
This is in response to your correspondence wherein you asked that the company be granted an exception to NASDAQ’s shareholder approval requirements for a proposed transaction (the “Proposed Transaction”) pursuant to Listing Rule 5635(f).
 
According to the information you provided, in the Proposed Transaction the company would convert all of the indebtedness it owes to the Debt Holder into shares of its common stock at a conversion price in excess of the current market price. Following the Proposed Transaction, the Debt Holder together with its affiliates would beneficially own approximately 60% of the company’s then outstanding common shares.  Currently, no shareholder owns as much as 10% of the outstanding shares. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(b) because the issuance would result in a change of control.
 
You stated that the company is an operator of upscale restaurants and that during the recent economic downturn consumers have eaten out much less than before, resulting in mounting losses and the depletion of the company’s cash. As a result, while the company has halted its planned development of new locations and has negotiated with its suppliers and landlords the reduction of certain costs, expenses, and lease obligations, the company is experiencing significant negative cash flow and has been unable to meet its obligations with its leasers and other creditors.
 
You stated that the company has received default notices from some of its creditors and landlords and that such notices are expected to increase dramatically as more time elapses without payment. Defaults on leases likely would cause the company’s vendors to demand cash on delivery for future transactions resulting in the company having to cease operations because it would be unable to acquire a food supply for its restaurants. Without the Proposed Transaction, the company would have enough cash to meet its obligations for only one month. In addition, you stated that any delay in the Proposed Transaction beyond a month, or perhaps slightly more if its creditors would agree, would mean that the company would be forced to file for bankruptcy. The company has retained counsel to prepare a bankruptcy filing, should one become necessary.
 
The Debt Holder is one of the company’s landlords and is its primary store equipment leaser. The amount the company owes to the Debt Holder under the leases represents substantially all of the company’s secured indebtedness, and the Debt Holder has indicated it may declare the leases in default. Pursuant to the Proposed Transaction, however, the default on the leases with the Debt Holder would be avoided. In addition, the amount of the ongoing lease payments the company would owe to the Debt Holder would be substantially reduced, which you stated is necessary for the company’s ongoing financial viability. You stated that the timetable for obtaining shareholder approval for the Proposed Transaction would require the company to exceed its cash position and that the company needs to take quick action before it is forced into bankruptcy by its creditors. The company has been unable to structure a transaction that would not require shareholder approval, and it has sought strategic alternatives without success.
 
The company believes that the Proposed Transaction would solve its current cash flow problems and also allow the company to seek additional financing. The company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement. In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with the bid-price requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements. This determination is based on the company’s representations that it needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and the possible cessation of its operations. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 732 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-12
Identification Number
730
This is in response to your correspondence wherein you asked that the company be granted an exception to NASDAQ’s shareholder approval requirements for a proposed transaction (the “Proposed Transaction”) pursuant to Listing Rule 5635(f).
 
According to the information you provided, in the Proposed Transaction the company would sell shares of its common stock, and warrants exercisable for additional shares, to accredited investors in a private placement. Without the requested exception, shareholder approval would be required pursuant to Listing Rule 5635(d) because the number of shares that could be issued exceeds 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value.
 
Regarding the company’s financial condition, you stated that without the funds that would be raised in the Proposed Transaction, the company would run out of cash in approximately three weeks by which time the company would no longer be financially or operationally viable.  You stated that delaying the Proposed Transaction for the time that it would take to get shareholder approval would be catastrophic to the company leaving it no viable alternative to bankruptcy. The company has already consulted with counsel regarding financial restructuring and bankruptcy. The company has concluded that the Proposed Transaction is its only opportunity to avoid insolvency and the cessation of its operations. The investors are not willing to enter into the Proposed Transaction on terms that would comply with the shareholder approval requirements, such as requiring shareholder approval of any issuance beyond 19.9% of the pre-transaction outstanding shares.
 
You stated that over a year ago, the company engaged an investment banker in an effort to raise sufficient capital to last through the current year and beyond. The effort was unsuccessful, and the engagement was terminated.  Approximately ten months ago, the company successfully completed a private placement but in an amount substantially below its fundraising goal. Additional capital raising efforts have been unsuccessful due in part, the company believes, to the current economic climate.  In the meantime, the company’s cash reserves have been depleted by the increased costs of the development of its subsidiaries’ products. To conserve cash and reduce expenses, the company has reduced its workforce by approximately 67%, closed one of its facilities, reduced management salaries, and negotiated reductions in liabilities.
 
You stated that the Proposed Transaction would rescue the company such that it would be financially and operationally viable. The company believes that following the Proposed Transaction, it will be in compliance with all of the requirements for continued listing on NASDAQ.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements. This determination is based on the company’s belief that the Proposed Transaction is its only opportunity to avoid insolvency and the cessation of its operations. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transactions and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
 
Publication Date*: 7/31/2012 Identification Number: 730 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-5  
Identification Number
723
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for the issuance of warrants in connection with a proposed amendment to the financial covenants under the company’s Term Loan Agreement (the “Amendment”).
 
Under the Amendment, the holders of the Term Loan have agreed to, among other things, provide relief from the financial covenants for one year in exchange for warrants to purchase more than 20% of the shares outstanding at a price less than both book and market value.  Additional warrants with the same terms could be issued 90 days and 150 days after the effective date of the Amendment if at least 75% of the Convertible Notes are not converted into equity securities of the company.  The company also agreed that the Term Loan holders would be allowed to designate a number of board members that would be approximately proportional to their post-exercise ownership interest in the company on a fully diluted basis.
 
Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 4350(i)(1)(B) because the issuance could result in a change of control; and (ii) Listing Rule 4350(i)(1)(D)(ii) because the issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the greater of book or market value.  Additionally, without an exception, the Amendment would not comply with the voting rights rule contained in Listing Rule 4351 because the Term Loan holders would be able to appoint members to the board based on their post-exercise ownership interest, and not their actual equity interest in the company.
 
According to the information you provided, the Amendment is necessary to avoid the default and potential cross-default and cross-acceleration of the company’s debt obligations.  You stated that the company’s financial predicament is not the result of insufficient cash.  You explained that the recent economic downturn has affected the company’s ability to meet certain financial ratios required by the Term Loan that were set approximately 2 years ago based on then-current projections, and in light of a relatively stable economy.  Because these ratios are calculated on a rolling four-quarter basis, the company expects to fail to meet these ratios early this year because the results from the first and second quarters last year will be replaced with current results reflecting the severe economic slow-down.  The Amendment would provide the company with at least four quarters of relief from its financial covenants.  In addition, the company’s independent auditors indicated that they would be unable to provide a “clean” audit opinion for its most recently completed fiscal year absent the Amendment, loan modifications to other loan agreements and significant borrowings thereunder, or an infusion of capital.  A going concern opinion would result in a default under the Revolving Line of Credit, which in turn, could allow the Term Loan holders to declare the full amount of the Term Loan to be immediately due and payable.  Furthermore, you stated that default under the Revolving Line of Credit would trigger a cross-default of the Convertible Notes resulting in the potential for cross-acceleration of all three debt instruments.  The company does not have the cash on hand to satisfy repayment of the debt instruments and would be unable to arrange alternate borrowings.  As a result, you stated that failure to enter into the Amendment will result in a cross-acceleration of these loans, which would require the company to seek bankruptcy protection.
 
You stated that the company has been in negotiations with the holders of the Term Loan for approximately four months and has explored numerous alternatives, including a possible sale of the company, to avoid the need for an amendment to the Term Loan.  However, due to the prevailing instability in the credit and financial markets, the company has been unable to enter into any other refinancing transaction.  The company proposed various amendments to the Term Loan holders which would have not required shareholder approval.  However, the Term Loan holders insisted that the stock issuance be completed in a manner necessitating complying with, or obtaining an exception from, NASDAQ’s shareholder approval requirements, and the company was unable to identify any viable alternatives.
 
The company believes that the Amendment would enable it to secure a supply of inventory sufficient to meet its needs for at least the next several months.  The company expects that if it receives the exceptions discussed above and completes the Amendment, it will meet the requirements for continued listing on NASDAQ for the next several months, except for the bid-price requirement.  In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with the bid-price requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s inability to find alternative sources of capital and its likely need to seek bankruptcy protection in the event that the Amendment is delayed.  In addition, we have determined to grant an exception from the voting rights requirement of Listing Rule 4351.  In that regard, we note that under the former SEC Rule 19c-4, as well as under the Listing Rule 4351, it is appropriate to consider whether an issuance is designed to rescue a company in financial distress.
 
The exceptions are subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Amendment, a letter describing the Amendment and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exceptions; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
 
Publication Date*: 7/31/2012 Identification Number: 723 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2009-2  
Identification Number
720
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for a proposed transaction that will enable the company to repay or refinance its 2009 Debt Obligations (the “Proposed Transaction”).
 
According to the information you provided, when a portion of the company’s 2009 Debt Obligations recently matured, the company lacked sufficient capital to repay it (without seeking protection under the bankruptcy laws) and only the Investor was willing to extend adequate credit to refinance it.  The Investor extended to the company an initial credit facility to allow the company to repay the portion of its 2009 Debt Obligations then due and to provide additional working capital.
 
The Investor also agreed to invest additional funds in the Proposed Transaction, which would enable the company to service or refinance the remainder of its 2009 Debt Obligations.  In order to induce the Investor to commit to making such additional investment, the company agreed to issue two series of convertible preferred stock, one voting and one non-voting, convertible into more than 20% of the pre-transaction outstanding common shares at a discount to the market price of the company’s common stock.  The company also agreed that the Investor would be allowed to designate a number of board members that would approximately correspond to its initial percentage equity ownership interest in the company and would decline pro ratably with any future decline in its ownership percentage.
 
Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 4350(i)(1)(B) because the issuance could result in a change of control; and (ii) Listing Rule 4350(i)(1)(D)(ii) because the potential issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the market value.  Additionally, without the exception, the Proposed Transaction would not comply with the voting rights rule contained in Marketplace Listing Rule 4351 because the voting convertible preferred stock would vote on an as-converted basis and could be converted at a discount to the market value.
 
You stated that the recent economic downturn and deepening credit crisis had forced the company to look for new sources of capital to survive as a going concern.  You further stated that absent the funding from the Proposed Transaction, the company would have no choice other than to file for protection under applicable bankruptcy laws.  In that regard, you noted that failure by the company to have in place a committed plan that would resolve the 2009 Debt Obligations within approximately two weeks of the date of your letter to us would constitute default under the company’s credit facilities, which would accelerate the company’s obligation to repay immediately the entire 2009 Debt Obligations and cross-accelerate repayment obligations with respect to a substantial portion of the company’s other indebtedness.  As a result, you indicated that unless the company completed the Proposed Transaction, it would be forced to seek bankruptcy protection.
 
You stated that for the past six months the company has been exploring its refinancing options with two separate investment advisors.  However, due to the prevailing instability in the credit and financial markets, the company has been unable to enter into any other refinancing transaction.  The company proposed various recapitalization structures to potential investors, including the Investor, which would have provided the company sufficient time to obtain shareholder approval.  However, the Investor insisted that the stock issuance be completed in a manner necessitating complying with, or obtaining an exception from, the shareholder approval requirements, and the company was unable to identify any viable alternatives.
 
The company believes that the Proposed Transaction would enable it to service or refinance its 2009 Debt Obligations, as well as its other debt obligations due in the following years.  The company expects that if it receives the exceptions discussed above and completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ except for the bid-price requirement.  In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to comply with the bid-price requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements and voting rights rule.  This determination is based on your representations regarding the company’s inability to repay its 2009 Debt Obligations while maintaining adequate working capital and its likely need to seek bankruptcy protection in the event that the Proposed Transaction is delayed.  The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 720 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-26
Identification Number
770
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for a proposed issuance of convertible notes (the “Notes”) in a transaction with the Investor (the “Proposed Transaction”).  
 
According to the information you provided, the company would borrow funds by issuing to the Investor the Notes, which would be convertible into more than 20% of the company’s pre-transaction outstanding shares of common stock at a discount to the market value.  Following conversion, the Investor could own a majority of the company’s then outstanding shares of common stock.  In addition, as part of the Proposed Transaction, the Investor would make a cash payment to the company in exchange for an exclusive license to develop and distribute one of the company’s products.  Without the requested exception, shareholder approval would be required of the issuance of the Notes pursuant to: (i) Listing Rule 4350(i)(1)(B) because the potential issuance could result in a change of control; and (ii) Listing Rule 4350(i)(1)(D)(ii) because the potential issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the greater of book or market value.  In addition, because two members of the company’s board of directors are also on the board of the Investor, shareholder approval may be required pursuant to Listing Rule 4350(i)(1)(A).
 
According to the information you provided, for over a year the company has unsuccessfully attempted to secure other financings.  You stated that the two most cited obstacles to securing investments in the company have been the uncertainty with respect to approval of one of its products by the United States Food and Drug Administration (the “FDA”) and the high cost to maintain the company’s manufacturing infrastructure during the approval process.  The company does not know whether or when it will secure FDA approval.
 
The company has implemented cash conservation measures including reducing its workforce by approximately 24%, reducing salaries for certain senior employees, and deferring payments to certain suppliers.  Nevertheless, the company currently projects that it will have enough cash to fund operations for less than four weeks at which point it would no longer be financially or operationally viable absent the Proposed Transaction.  You stated that its cash cannot sustain it through the duration of a proxy solicitation process and, consequently, the company would be required to cease operations and file for bankruptcy or otherwise liquidate, absent the exception.
 
You stated that the Investor is not willing to enter into the Proposed Transaction on terms that would comply with the shareholder approval requirements and is not willing to commit to any part of the Proposed Transaction subject to any material contingency.  You indicated that the Proposed Transaction represents the company’s best opportunity to avoid insolvency and the cessation of its operations.  The company has retained bankruptcy counsel.
 
The company would use the proceeds from the Proposed Transaction to fund its activities in support of its efforts to obtain FDA approval.  The company expects that the Proposed Financing would be sufficient to fund its operations for more than six months.  Currently, the company is pursuing alternatives for an additional financing, and, in that regard, it has hired a placement agent.  You stated that without the Proposed Transaction, however, the company would not be able to pursue this or any other additional financing (the “Subsequent Financing”).
 
Two of the company’s directors are also on the board of the Investor, and one of those directors is the Investor’s CEO.  Both of the directors recused themselves from all of the company’s board decisions relating to the Proposed Transaction and will not receive any compensation from the company or the Investor in connection with the Proposed Transaction.
 
The company currently complies with all requirements for continued listing except for the bid price and stockholders’ equity requirements and has addressed these deficiencies at a hearing before a NASDAQ Qualifications Panel (the “Panel”).  As of the date of this letter, the Panel has not rendered a decision regarding these concerns.  However, the company has received shareholder approval to effect a reverse stock split to address its bid price deficiency and believes that it will comply with the market value of listed securities alternative to the equity requirement when the Proposed Transaction is announced.  The company also believes that it will satisfy the equity requirement if it is successful in completing the Subsequent Financing.
 
Based on our review of the circumstances described in your correspondence, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s financial condition and its likely need to seek bankruptcy protection in the event that the issuance of the Notes is delayed.  The exception is subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in connection with the issuance of the Notes, a letter describing the issuance of the Notes and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.  This determination in no way affects the jurisdiction of the Panel, or any decision that is rendered by the Panel, with regard to the matters under its consideration relating to the company’s compliance with the continued listing requirements.
 
 
Publication Date*: 7/31/2012 Identification Number: 770 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-20
Identification Number
764
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for a proposed issuance of warrants in a proposed transaction (the “Proposed Transaction”) with the Investors.
 
According to the information you provided, in the Proposed Transaction, the company would issue to the Investors non-convertible notes and warrants.  The warrants would be exercisable for more than 20% of the company’s pre-transaction outstanding shares of common stock at a price less than the greater of book or market value.  Without the requested exception, shareholder approval would be required of the issuance of the warrants pursuant to: (i) Listing Rule 4350(i)(1)(B) because the potential issuance could result in a change of control; and (ii) Listing Rule 4350(i)(1)(D)(ii) because the potential issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the greater of book or market value.  You stated that absent the exception, the company would be required to cease its operations and either file for bankruptcy protection or liquidate.
 
The company believes that its current and future financial operations, and its potential sources of funding, have been negatively impacted by several factors including economic conditions, which the company believes has caused it to experience lower than expected sales.  You stated that in light of its difficulties, the company undertook extensive efforts to conserve cash and reduce expenditures, and it has laid-off approximately 20% of its employees.  Nevertheless, the company projects that it will run out of cash in approximately three weeks unless it can complete the Proposed Transaction.  Following the Proposed Transaction, the company expects to restructure its operations and to explore additional options for further cost reductions.  You stated that without the Proposed Transaction, the company faces certain insolvency and would be unable to pursue these activities.  The company has already retained bankruptcy counsel.
 
Over the past several months, the company unsuccessfully attempted to obtain financing either on terms that would not require shareholder approval or within a timeframe that would have allowed the transaction to be submitted to shareholders.  With respect to the Proposed Transaction, the Investors indicated to the company that they would be unwilling to proceed if the warrant coverage were to be eliminated or reduced.  In addition, the Investors indicated that they are not willing to proceed based on a deferred issuance of the warrants or a delay in the warrants’ exercisability pending a shareholder vote.
 
As a condition to the Proposed Transaction, the company will adopt a budget that includes cost reduction and asset management measures intended to ensure that the company can reach positive cash flow operations without reliance on additional financing. These measures include the possible sale of certain assets (the “Assets Sale”).  The company has retained investment banking firms to assist in the Assets Sale and has already entered into agreements for the sale of a significant portion of its assets.
 
The Investors do not include any officer, director, employee, or consultant of the company.  An employee of Investor One serves on the company’s board of directors.  That director, however, is not a partner in, or a controlling shareholder or executive officer of, Investor One and will not be the beneficial owner of, or have a pecuniary interest in, the securities that Investor One would acquire in the Proposed Transaction.
 
The company believes that following the Proposed Transaction it will be in compliance with all of the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement.  In that regard, the company has committed to take the necessary action to address the bid price issue during the applicable compliance period.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s financial condition and its likely need to seek bankruptcy protection in the event that the Proposed Transaction is delayed.  The exception is subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the
company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 764 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-19
Identification Number
763
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for a proposed issuance of securities (the “Proposed Transaction”).  The company is a bank holding company, whose primary asset is the Bank.
 
According to the information you provided, in the Proposed Transaction, the company would sell shares of its common stock, and notes convertible into additional shares of common stock, to institutional investors (the “Investors”).  The issuance would exceed 20% of the company’s pre-transaction outstanding shares of common stock and could be at a price less than the greater of book or market value.  None of the Investors would own or have the right to acquire more than 9.9% of the company’s post-transaction outstanding shares.  The Investors would not include any of the company’s officers, directors, employees or consultants.  Without the requested exception, shareholder approval would be required pursuant to Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) because the issuance would exceed 20% of the pre-transaction outstanding shares and could be a discount to the greater of book or market value.  You stated that the delay that would result in seeking shareholder approval of the Proposed Transaction could lead to the company’s bankruptcy.
 
With regard to the company’s financial condition, you stated that the company and the Bank have been negatively impacted by current economic conditions.  The company has experienced substantial losses during the past three quarters, and the quality of its loan portfolio has significantly declined.  The company does not have sufficient cash to meet its current and long-term obligations including its debt-service requirements.  The company is in default under a line of credit, which is collateralized by 100% of the Bank’s outstanding common stock.  All of the company’s other credit facilities have been terminated due to the company’s financial condition, and, as a result, the company has no additional available funds under those facilities.
 
The company’s primary source of funds had been dividends received from the Bank.  As result of applicable banking regulatory restrictions, that source of funds is no longer available.
 
You stated that approximately four months ago, the company announced that it had engaged financial advisors to explore strategic alternatives, including raising additional capital.  To date, these efforts have been unsuccessful, and the company believes that the Proposed Transaction is the last available alternative.
 
You stated that the Proposed Transaction is intended to address the urgent liquidity needs of the company and the Bank, to help decrease the deposit run-off currently being experienced, and to bring the company and the Bank back into compliance with the applicable minimum capital requirements.
 
The company believes that following the Proposed Transaction it will be in compliance with all of the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement.  In that regard, the company has committed to effect a reverse split of its common stock if necessary to comply with the bid-price requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s financial condition and its likely need to seek bankruptcy protection in the event that the Proposed Transaction is delayed.  The exception is subject to the following:  (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 763 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-18
Identification Number
762
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for two proposed transactions (the “Proposed Transactions”).
 
According to the information you provided, in one of the Proposed Transactions, the company would issue to Investor One shares of common stock, and warrants exercisable for additional shares, in connection with a loan agreement pursuant to which Investor One would provide a credit facility.  In the other of the Proposed Transactions, the company would issue to Investor Two a note convertible into shares of common stock (the “Convertible Note”) and warrants exercisable for additional shares.  Because the Proposed Transactions would occur at about the same time and the proceeds would be used for the same purpose as described below, the Proposed Transactions would be aggregated for purposes of determining whether shareholder approval would be required.  Without the requested exception, shareholder approval would be required pursuant to Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) because the aggregate issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the greater of book or market value.  Neither Investor One nor Investor Two (collectively, the “Investors”) is an officer, director, employee, or consultant of the company.  Neither would own as much as 20% of the company’s outstanding shares of common stock or voting power as a result of the Proposed Transactions.  Investor Two would be entitled to appoint one member of the company’s board of directors for as long as it and its affiliates hold a specified interest in the company.
 
With regard to the company’s financial condition, you stated that the company lacks the necessary funds to pay the outstanding principal amount on its Senior Secured Notes (the “Senior Notes”), which will be due in full at maturity in approximately two weeks (the “Amount Due”).  The Amount Due is approximately triple the amount of the company’s current cash and cash equivalents.  The Senior Notes are secured by a first lien security interest in all of the company’s assets.  The company has unsuccessfully attempted to pursue a restructuring of the Senior Notes.  You stated that if the company does not pay the Amount Due at maturity, the holder of a majority of the Senior Notes could initiate foreclosure proceedings, which would likely force the company to seek bankruptcy protection.  The proceeds from the Proposed Transactions would be used in part to make the required payment on the Senior Notes.
 
You stated that over the past several months the company attempted to secure financings with sufficient time to obtain shareholder approval or that would not require shareholder approval.  In that regard, approximately two weeks ago, discussions between the company and the Investors resulted in term sheets for transactions which the company believed would not require shareholder approval.  Subsequently, however, the company’s market value declined to an amount below its book value such that the definitive terms included an issuance price below book value, thereby requiring shareholder approval.  In addition, the terms have changed such that the issuance price and exercise price would be below market value and would be subject to future reductions.  The company unsuccessfully attempted to get the Investors to restructure the Proposed Transactions to meet the requirement of the Rule, such as by seeking shareholder approval for any issuance beyond 19.9% of the pre-transaction outstanding shares.  You stated that the Investors have been unwilling to delay any portion of their funding pending shareholder approval.  Moreover, you stated that the company has concluded that the delay in securing shareholder approval would seriously jeopardize the financial viability of the company.
 
The company believes that following the Proposed Transactions it will be in compliance with all of the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement.  In that regard, the company has committed to effect a reverse split of its common stock if necessary to comply with the bid-price requirement upon the expiration of any applicable grace periods.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s inability to meet its payment obligations on the Senior Notes and its likely need to seek bankruptcy protection in the event that the Proposed Transactions are delayed.  The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transactions, a letter describing the Proposed Transactions and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 762 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-14
Identification Number
759
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for certain proposed transactions (the “Proposed Transactions”).
 
According to the information you provided, in the Proposed Transactions, the company would issue more than 20% of its pre-transaction outstanding common shares at a discount: (i) in a private placement to several institutional investors including certain existing shareholders; and (ii) in exchange for the Note and warrants held by the Note Holder (the “Exchange”).  No officer, director, employee, or consultant of the company would acquire securities in the Proposed Transactions.  Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 4350(i)(1)(B) because the issuance would result in a change of control; and (ii) Listing Rule 4350(i)(1)(D)(ii) because the issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the market value.
 
You stated that the company does not have sufficient cash resources to operate its business for the time that it would take to obtain shareholder approval.  You further stated that absent the funding from the Proposed Transactions, the company would have no choice other than to file for protection under applicable bankruptcy laws.  The company does not have the cash resources to meet its payroll requirements, and, in fact, it failed to pay its employees for the most recent pay period.  The company is unable to fund it accounts payable obligations.  Some of its suppliers and service providers have stopped doing business with the company, and many others will do likewise unless funding is obtained immediately.
 
The company has previously required, and expects to require in the future, significant infusions of equity capital to continue the development of its products.  For nearly a year, the company has unsuccessfully sought to raise equity capital.  Approximately six months ago, the company issued the Note and pledged all of its assets as security for the Note.  Subsequent to the issuance of the Note, potential investors who expressed interest in the company would agree to invest only if the Note Holder would exchange its debt for equity.  Previously, the Note Holder would not agree to such an exchange.  You stated that because of the increasingly high likelihood of a bankruptcy filing absent an equity infusion, the Note Holder has only recently agreed to the Exchange.
 
The company believes that the Proposed Transactions would enable it to continue its operations for at least three years and to return to profitability.  Further, the company expects that if it completes the Proposed Transactions, it will meet the requirements for continued listing on NASDAQ except for the bid-price requirement.  In that regard, the company has committed to complete a reverse stock split at a ratio sufficient to comply with the bid-price requirement in the near term.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s inability to fund its operations and its likely need to seek bankruptcy protection in the event that the Proposed Transactions are delayed.  The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transactions, a letter describing the Proposed Transactions and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
 
Publication Date*: 7/31/2012 Identification Number: 759 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2008-12  
Identification Number
757
This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for a transaction (the “Proposed Transaction”) under consideration by the company.  In addition, you asked that to the extent necessary, the company be granted an exception to the voting rights requirements of Marketplace Listing Rule 4351 with respect to Investor’s right to appoint members of the company’s board of directors (the “Board”).
 
According to the information you provided, in the Proposed Transaction, the company would issue to the Investor: (i) non-convertible senior secured notes (the “Notes”); and (ii) shares of common stock equal to approximately 62% of the pre-transaction outstanding shares at a discount to market value.  As such, without the requested exception, shareholder approval would be required pursuant to: (i) Marketplace Listing Rule 4350(i)(1)(B) because the issuance would result in a  change of control; and (ii) Marketplace Listing Rule 4350(i)(1)(D)(ii) because the issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the market value.
 
Pursuant to the Proposed Transaction, the Investor would have the right to appoint members of the Board (the “Board Rights”).  The percentage of the company’s Board that the Investor could appoint would be consistent with its percentage ownership interest in the company.  If the ownership position were to decline, the number of directors the Investor could appoint would decline pro ratably such that the percentage of the Board that it could appoint would remain approximately equal to its percentage ownership interest in the company.  As such, the Board Rights comply with Listing Rule 4351.
 
You stated that as a result of several events since 2005, the company’s business has deteriorated significantly.  Among those events is a decline in revenue due to a new federal law that impacted the company’s customers such that the customers were less likely to purchase the company’s products.  As a cost-savings measure, the company eliminated approximately 27% of its work force during the first quarter of the current year.  Nonetheless, without the Proposed Transaction, the company likely could not fund its operations longer than approximately one month.  You stated that any delay in closing the Proposed Transaction to seek shareholder approval most likely would cause the company to seek the protections of bankruptcy.
 
Over the past several months, the company explored other financing alternatives but was unsuccessful in finding a suitable transaction.  The company expects that the Proposed Transaction would provide sufficient capital for it to survive its current difficulties and succeed in executing its business plans.  Further, the company expects that if it completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ over the next several months with the possible exception of the bid-price requirement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s inability to fund its operations and its likely need to seek bankruptcy protection in the event that the Proposed Transaction is delayed.  The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the  audit  committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.  Because the Board Rights comply with the voting rights requirements, an exception to Listing Rule 4351 is not needed.
 
Publication Date*: 7/31/2012 Identification Number: 757 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2007-4
Identification Number
780
This is in response to your correspondence regarding a proposed issuance of securities in connection with a restructuring of the company’s debt (the “Restructuring”) and a subsequent private placement (the “Private Placement”).  With respect to the Restructuring and Private Placement (collectively, the “Transactions”), you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2).
 
According to the information you provided, due to recent concerns about its solvency, the company has retained bankruptcy counsel.  Approximately one month ago, the company failed to make principal and interest payments under its senior convertible note (the “Note”) and took steps toward an intended filing under Chapter 11 of the U.S. Bankruptcy Code.  Prior to the intended filing, the company entered into negotiations regarding the Restructuring with the Original Holder to whom the company had issued the Note approximately nine months ago and who still held the Note at the time the negotiations commenced.
Under the Restructuring, pursuant to a note purchase agreement (the “Note Purchase Agreement”), the Original Holder has already sold the Note to the Buyer, and the company has promised to issue warrants (the “Warrants”) to the Original Holder exercisable for shares of common stock.  The Warrants will be issued only after the company is permitted to do so under the applicable NASDAQ requirements.  The Buyer has agreed that the company will not be required to make any payments of principal or interest for 30 days following the Note Purchase Agreement (the “Forbearance Period”).  Following the Forbearance Period, the principal and interest payments would resume unless the Notes have been fully converted into common stock as expected under the terms of the Restructuring.  In that regard, the company and the Buyer have agreed to amend the terms of the Note to provide that when permitted by NASDAQ’s rules, the Notes will convert into shares of common stock.  Following such conversion, all of the covenants (the “Covenants”) and required payments under the Notes will cease to exist.  You stated that as a condition to the Buyer purchasing the Note, the company has entered into an agreement for the Private Placement with new investors (the “Investors”).  The number of shares of common stock that would be issued in the Restructuring and the Private Placement would equal more than 20% of the pre-transaction outstanding shares.  As such, without the requested exception, shareholder approval would be required pursuant to Listing Rule 4350(i)(1)(D)(ii) and possibly also pursuant to Listing Rule 4350(i)(1)(B).
 
Previously, the company attempted to raise new capital but investors were unwilling to invest due to the Covenants associated with the Note.  The Original Holder was unwilling to renegotiate the terms of the Covenants, but was willing to sell the Note to the Buyer under the Restructuring.  The Investors will purchase shares in the Private Placement only after the Covenants cease to exist.
 
In your submission, you stated that the delay necessary to seek shareholder approval would seriously jeopardize the financial viability of the company and that the Restructuring and the Private Placement are the company’s last alternative to filing for bankruptcy protection.  You stated that the company does not have sufficient cash on hand or otherwise available to continue its operations, or to meet its other current obligations, long enough to obtain shareholder approval.  In that regard, you noted that the company’s past due general vendor payables and payroll expenses exceed its available cash.  Moreover, you indicated that the company would be unable to make payments on the Note following the Forbearance Period.
 
The Private Placement would enable the company to meet its current obligations, specifically rent, utilities and payroll.  In addition, the company would be better positioned for the future because the proceeds would be used in part to increase its manufacturing capacity to enable it to fulfill an existing sales agreement.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements.  This determination is based on your representations regarding the company’s inability to meet its financial commitments and its likely need to seek bankruptcy protection in the event that the Transactions are delayed.  The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Transactions, a letter describing the Transactions and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved the exception; and (iii) the company must issue a press release that includes the information required to be included in the shareholder mailing.
 
Publication Date*: 7/31/2012 Identification Number: 780 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2006-4  
Identification Number
815
This is in response to your correspondence, wherein you described a proposed issuance of securities in connection with a restructuring of the company’s debt (the “Restructuring”). With respect to the Restructuring, you asked that the company be granted exceptions to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) and to the voting rights requirements of Marketplace Rules 4351 and IM-4351 (collectively, the “Voting Rights Rule”).
 
According to the information you provided, in the Restructuring the company would replace its existing senior secured credit facility with one or more new credit facilities. In addition, the company would refinance its indebtedness underlying certain outstanding convertible notes through an exchange offer that would include the issuance of: (i) senior subordinated notes; (ii) new convertible notes that would be convertible into Series B preferred stock; and (iii) Series A preferred stock.  Both the Series A and the Series B would be convertible into common stock.
 
The potential issuance of common stock exceeds 20% of the pre-transaction outstanding shares and could be at a price less than the greater of book and market value, and it could result in a change of control.  As such, without the requested exception, shareholder approval would be required under Rules 4350(i)(1)(D)(ii) and 4350(i)(1)(B).
 
In addition, you stated that in connection with the Restructuring the company would adopt a management incentive plan (“MIP”) pursuant to which certain senior management employees could receive shares of common stock as equity compensation.  The total amount of shares reserved under the MIP would be 10% of the company’s outstanding stock.  Without the requested exception, shareholder approval would be required for the MIP under Listing Rule 4350(i)(1)(A).
 
You stated that certain of the preferred stock that would be issued in the Restructuring would be entitled to vote on an as-converted basis and may be convertible at a discount to the market price of the common stock (the “Voting Power”). In addition, four of the seven members of the company’s board of directors would be designated, at least initially, by certain of the holders of the company’s outstanding debt, and the board representation may be at a percentage that exceeds the debt holders’ relative contribution to the company (the “Board Representation”).  Without the requested exception, the Voting Power and the Board Representation would not be permitted under the Voting Rights Rule.  You stated that the company has been advised that the lenders would not agree to any limitation on these voting rights and believes that attempts to impose limits would greatly endanger the prospects of effecting the restructuring.
 
In your submission, you stated that the company must restructure its debt immediately or it will almost certainly be forced to file for bankruptcy, and it does not believe that it has time to obtain shareholder approval.  The company is currently in default under its credit agreement due to violations of financial covenants in the third and fourth quarters of last year.
 
Based on our review of the circumstances described in your letters and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements with the limitation that such exception will not apply to the MIP.  This limited exception is based on your representations regarding the company’s inability to meet its financial commitments and its likely need to seek bankruptcy protection in the event that the Restructuring is delayed.  In addition, we have determined to grant an exception from the Voting Rights Rule applicable to the Voting Power and the Board Representation.  In that regard, we note that under the former Rule 19c-4, as well as under the Voting Rights Rule, it is appropriate to consider whether an issuance is designed to rescue a company in financial distress.  Be advised that the MIP will require shareholder approval under Listing Rule 4350(i)(1)(A). As a general matter, we do not believe that an issuance of securities as equity compensation is an appropriate application of Marketplace Listing Rule 4350(i)(2).  Further the exceptions do not apply to any other requirements and, notwithstanding the granting of the exception with regard to Board Representation, the company remains subject to NASDAQ’s board independence and committee requirements including Marketplace Rules 4350(c) and 4350(d).
 
The exceptions are subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Restructuring, a letter describing the Restructuring and alerting them to its omission to seek the shareholder approval that would otherwise be required and describing the Voting Rights and Board Representation; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved the exceptions; and  (iii) the company must issue a press release that includes the information required to be included in the shareholder mailing
Publication Date*: 7/31/2012 Identification Number: 815 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2005-51
Identification Number
898
This is in response to your letters wherein you described a proposed private offering of the company’s securities (the “Transaction”) and asked that the company be granted an exception (the “Exception”) to the stockholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2).
 
Prior to this Transaction, you had previously issued the following securities (the “Prior Transactions”):
(i) convertible preferred stock and warrants pursuant to a transaction entered into September 2004, and amended in August 2005 (the “Amended September 2004 Transaction”); (ii) shares of common stock, in connection with the Amended September 2004 Transaction; (iii) shares of common stock and warrants in August 2005 (the August 2005 Transaction”); and (iv) the potential issuance of common stock due to the exercise of participation rights (following the August 2005 Transaction) held by investors who purchased convertible notes from the company in March 2005.
 
According to the information you provided, in the Transaction, the company would sell shares of its common stock, at below market value, with warrants attached that would allow the purchase of additional shares of the common stock.  You represented that no officers, directors, employees or consultants will participate in the Transaction.
 
Although the issuance in the Transaction would be less than 20% of the pre-transaction outstanding shares, the Transaction would require shareholder approval pursuant to 4350(i)(1)(D) because together with the Prior Transactions  with which the Transaction would be aggregated, the potential issuance would exceed 20% of the pre-transaction shares outstanding at a price less than market value.
 
In your submission, you stated that without the Exception, the company may be required to seek bankruptcy protection within a week, and that the company therefore does not have time to seek shareholder approval.  Specifically, according to the company’s cash projection, it will run out of cash within two weeks unless it successfully liquidates certain investments and defers payment on substantial amounts of its account payables.  In any event, the company does not expect to be able to meet its current and ongoing obligations for more than three weeks.  The company estimates that it would take a minimum of seven weeks and as many as thirteen weeks, to obtain shareholder approval for this Transaction.  You stated that completing the Transaction pursuant to the Exception seems to be the company’s last alternative to bankruptcy.
 
In addition, you stated that the company would expect material and potentially long-lasting material adverse effects on its business if it is unable to secure the needed financing.  It would be unable to pursue protection of its intellectual property rights and to retain its employees.  If it is able to consummate the Transaction, the company expects it would be able to continue operations into early 2006 and be better positioned to pursue an underwritten public offering to further extend the company’s viability.
 
Based on our review of the circumstances described in your letter and on your representations regarding the company’s financial condition, we have determined to grant the Exception.  This determination is based on your representations regarding the company’s inability to meet its financial commitments and likely need to seek bankruptcy protection in the event that the Transaction is delayed.  The Exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Transaction, a letter describing the Transaction and alerting them to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit  committee, or a comparable body of the board of directors, has expressly approved the Exception; and (iii) the company must issue a press release that includes the information required to be included in the shareholder mailing.
 
 
Publication Date*: 7/31/2012 Identification Number: 898 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-87
Identification Number
958
Rule 4350(i)(1)(D)(ii):  Each issuer shall require shareholder approval ... prior to the issuance of designated securities … in connection with a transaction other than a public offering involving: … (ii) the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable [for] common stock) equal to 20% or more of the common stock or 20% of more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
 
Rule 4350(i)(2):  Exceptions to the shareholder approval requirements may be made upon application to NASDAQ when: (A) the delay would seriously jeopardize the financial viability of the enterprise; and (B) reliance by the company on this exception is expressly approved by the audit committee or a comparable body of the board of directors.  A company relying on this exception must mail to all shareholders no later than ten days before issuance of the securities a letter alerting them to its omission to seek the shareholder approval that would otherwise be required and indicating that the audit committee or a comparable body of the board of directors has expressly approved the exception.
 
Relevant Facts:  A company proposes an equity financing (the “Proposed Transaction”) and requests that it be granted an exception to NASDAQ’s shareholder approval requirements pursuant to Listing Rule 4350(i)(2) (the “Exception”).  The company states that a delay in completing the Proposed Transaction to secure shareholder approval would seriously jeopardize the financial viability of the company.  Specifically, the company represents that it would be unable to meet its payroll and trade obligations for the following month and would be required to file for bankruptcy within two months.  The company notes that its Audit Committee has approved reliance on the Exception.
 
Under the proposal, the company plans to issue common stock up to 20% of its pre-transaction shares at a discount to the market price with 50% warrant coverage.  The warrants will have an exercise price 10% above the purchase price of the common stock and would have only the standard anti-dilution provisions related to changes in the company’s capital structure.  The company states that no directors, officers, employees, consultants or affiliates will participate in the private placement.  No investor will obtain a post-transaction holding of 20% of the common stock outstanding.  The company represents that the proceeds from the Proposed Transaction will provide sufficient funding for operations for the next nine months.
 
Issue:  Is the company eligible for a Financial Viability Exception, pursuant to Listing Rule 4350(i)(2)?
 
Determination:  NASDAQ noted that the Proposed Transaction would require shareholder approval pursuant to Listing Rule 4350(i)(1)(D).  However, based on the company’s representation that without the requested Exception its financial viability would be seriously jeopardized, NASDAQ determined to grant the company’s request.  Under the terms of the Exception, the company was required to send a letter to all shareholders and to issue a press release describing the transaction at least ten days prior to the closing of the transaction.
 
Publication Date*: 7/31/2012 Identification Number: 958 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2004-29
Identification Number
926
Rule 4350(i)(2):  Exceptions to the shareholder approval requirements may be made upon application to NASDAQ when: (A) the delay would seriously jeopardize the financial viability of the enterprise; and (B) reliance by the company on this exception is expressly approved by the audit committee or a comparable body of the board of directors.  A company relying on this exception must mail to all shareholders no later than ten days before issuance of the securities a letter alerting them to its omission to seek the shareholder approval that would otherwise be required and indicating that the audit committee or a comparable body of the board of directors has expressly approved the exception.
 
Rule 4351:  Voting rights of existing shareholders of publicly traded common stock registered under Section 12 of the Act cannot be disparately reduced or restricted through any corporate action or issuance.  Examples of such corporate action or issuance include, but are not limited to, the adoption of time-phased voting plans, the adoption of capped voting rights plans, the issuance of super-voting stock, or the issuance of stock with voting rights less than the per share voting rights of the existing common stock through an exchange offer.
 
IM-4351.  Voting Rights Policy:  [NASDAQ’s] Voting Rights Policy is based upon, but more flexible than, former SEC Rule 19c-4.  Accordingly, The NASDAQ Stock Market will permit corporate actions or issuances by NASDAQ issuers that would have been permitted under Rule 19c-4, as well as other actions or issuances that are not inconsistent with this policy. In evaluating such other actions or issuances, NASDAQ will consider, among other things, the economics of such actions or issuances and the voting rights being granted. NASDAQ's interpretations under the policy will be flexible, recognizing that both the capital markets and the circumstances and needs of NASDAQ issuers change over time.
 
Relevant Facts:  A company proposes to issue convertible preferred stock and a warrant (the “Preferred Stock” and the “Warrant”, respectively) to a group of investors (the “Investors”).  In addition, as a condition to making the investment, the Investors are requiring that the principal amount and the accrued and unpaid interest of the outstanding debentures previously issued by the company to other investors be converted into Preferred Stock at the first closing (together with the Preferred Stock and the Warrant, the “Proposed Transaction”).
 
The Preferred Stock will vote on an as-converted basis; however, the Investors will not be entitled to vote on the shares to be issued in the second closing.  Additionally, the Investors will be entitled to nominate two directors to the company’s board of directors.  The company’s board is currently comprised of seven directors.  Assuming the Investors’ nominees replace two current directors, the Investors’ representation on the board would equal approximately 29%.
 
As structured, the Proposed Transaction would require shareholder approval.  The company represented that a delay in the completion of the Proposed Transaction, due to the need to secure shareholder approval, would seriously jeopardize the financial viability of the company.  Accordingly, the company sought relief from NASDAQ’s shareholder approval rules, pursuant to the Financial Viability Exception (the “Exception”) available under Listing Rule 4350(i)(2), stating that its cash and cash equivalents could not sustain the company through the duration of the proxy solicitation process and that without the Exception, it would significantly curtail, or cease entirely, its operations and/or file for bankruptcy protection.  The company noted that its audit committee had approved the reliance on the Exception.
 
The company is requesting the Exception solely for the issuance of $15 million in Proposed Transaction at the first closing.  Subsequently, the company will seek shareholder approval for the remaining $10 million investment prior to a second closing.
 
Issue:  Is the company eligible for a Financial Viability Exception, pursuant to Listing Rule 4350(i)(2)?
 
Determination:  Based on a review of the circumstances described above, NASDAQ determined to grant the company’s request for an exception from the shareholder approval requirements because without the requested exemption the company would have no alternative to meet its capital requirements and may have to seek bankruptcy protection in the event that the transaction was delayed.  The company was required to send a letter to all shareholders and to issue a press release describing the transaction at least ten days prior to closing the transaction and alerting shareholders of the company’s omission to seek the shareholder approval that would otherwise be required.
 
Issue:  Is the issuance of the Preferred Stock consistent with Listing Rule 4351, NASDAQ’s Voting Rights Rule, and IM-4351, NASDAQ’s Voting Rights Policy?
 
Determination:  NASDAQ determined that because the Preferred Stock will vote on an as-converted basis and may be converted at a discount to market value, the issuance of the Preferred Stock would be presumed to be prohibited.  See, e.g., IM-4350-1.  However, NASDAQ noted that under the Voting Rights Rule and Policy, it is appropriate to consider whether an issuance is designed to “rescue” a company in financial distress.  In such cases, it may be permissible to issue preferred stock with heightened voting protection that is consistent with the reasonable expectations of investors willing to provide additional equity to the company in these circumstances.  See Section III.C.2 of SEC Release No. 34-35121.  Accordingly, based on the company’s assertion that the voting rights provisions of the Preferred Stock as described are the only basis on which the Investors are willing to proceed with the Proposed Transaction, the company’s representations regarding its financial situation, and the analysis of the voting rights in these circumstances, NASDAQ concluded that the Preferred Stock conversion and voting provisions are consistent with the Voting Rights Rule and Policy.
 
Publication Date*: 7/31/2012 Identification Number: 926 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2002-7
Identification Number
972
Rule 4350(i)(1)(B):  Each issuer shall require shareholder approval prior to the issuance of designated securities … when the issuance or potential issuance will result in a change of control.
 
Rule 4350(i)(2):  Exceptions to the shareholder approval requirements may be made upon application to NASDAQ when: (A) the delay would seriously jeopardize the financial viability of the enterprise; and (B) reliance by the company on this exception is expressly approved by the audit committee or a comparable body of the board of directors.  A company relying on this exception must mail to all shareholders no later than ten days before issuance of the securities a letter alerting them to its omission to seek the shareholder approval that would otherwise be required and indicating that the audit committee or a comparable body of the board of directors has expressly approved the exception.
 
Issue:  The company proposes to raise capital through the sale of convertible preferred stock and warrants (the “transaction”) to another corporation (the “Investor”).  The proposed transaction would result in a change of control and therefore required shareholder approval.  The company requested a financial viability waiver to the shareholder approval requirement.
 
Relevant Facts:  The company stated that a delay in securing shareholder approval would seriously jeopardize its financial viability.  Specifically, it noted that without this transaction, the company would be unable to meet its current obligations, including, but not limited to, lease payments and payroll, and would therefore be forced to seek bankruptcy protection within the next two weeks.  The company also indicated that it was currently in default on several of its credit obligations.
 
The company stated that it had been attempting to raise additional equity over the last several months, but had been unsuccessful in those efforts until now.  The company also stated that the purchaser was only willing to proceed with the financing if it could immediately close on the entire transaction.
 
Finally, the company represented that upon closing the transaction, it would satisfy the continued listing requirements for The NASDAQ National Market and would have sufficient capital to fund operations for the next twelve months.  The company’s audit committee approved the company’s reliance on the financial viability exception to the shareholder approval requirement.
 
Determination:  Without the requested exception, shareholder approval would be required, pursuant to Listing Rule 4350(i)(1)(B).  However, based on a review of the circumstances described above, NASDAQ determined to grant the company’s request for an exception to the shareholder approval requirements.  This determination was based on representations made by the company regarding its ability to meet certain financial obligations, including the possibility that the company could be subject to bankruptcy proceedings, in the event that the transaction was delayed.  The company was required to send a letter to all shareholders and issue a press release describing the transaction at least ten days prior to closing the transaction.
 
Publication Date*: 7/31/2012 Identification Number: 972 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2014-4
Identification Number
1130
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) from Nasdaq’s shareholder approval requirements with respect to the proposed issuance of securities (the “Proposed Transaction”).
 
You have stated that since its inception, the Company has recorded net losses in every fiscal year but one. Additionally, in the most recent annual report on Form 10-K, the Company’s independent auditor includes the qualification that there is substantial doubt concerning the Company’s ability to continue as a going concern. You have stated that, without the Proposed Transaction, the Company has only enough cash to fund operations for the next four weeks.
 
In the Proposed Transaction, the Company will issue units consisting of common stock and convertible preferred stock (the “Preferred Stock”). The purchase price would be at a discount to the current market value of the units (when such value is determined by adding the current market values of the common stock shares issued as part of the units and common stock shares to be issued upon a future conversion of the Preferred Stock shares issued as part of the units).
 
You stated that investors in the Proposed Transaction would include officers and directors, as well as current and new shareholders of the Company (the “Proposed Investors”). Following completion of the Proposed Transaction and subject to conversion of the Preferred Stock, the Proposed Investors would own greater than 50% of the outstanding common stock shares, with the largest shareholder owning more than 20% of the outstanding common stock shares. The common stock shares issued or issuable as a result of the Proposed Transaction will represent more than 20% of the pre-transaction total number of outstanding common stock shares.
 
You stated that the Company has pursued multiple alternative financing strategies for over one year, including the potential sale of the Company, and that there are no realistic alternatives to the Proposed Transaction. You stated that if the Proposed Transaction is not completed in the very near term, the Company would be forced to cease operations and terminate most employees, and that the Company’s assets would be liquidated through an assignment for the benefit of creditors or through a bankruptcy process. You stated that there can be no assurance that any liquidation proceeds would remain for distribution to the Company’s shareholders. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
 
Without the requested exception, shareholder approval may be required pursuant to each of the following rules: Listing Rule 5635(b), because one of the Proposed Investors would own more than 20% of the shares of common stock outstanding upon completion of the Proposed Transaction; Listing Rule 5635(c), because the issuance at a discount of common stock shares to the officers and directors constitutes equity compensation; and Listing Rule 5635(d), because common stock shares issued or issuable as a result of the Proposed Transaction at a price less than the greater of book or market value would represent more than 20% of the pre-transaction number of outstanding common stock shares.
 
Based on our review of the circumstances described in your correspondence and on your representations regarding the Company’s financial condition, we have determined to grant the requested exception to the shareholder approval rules. This determination is based upon your representations that the Company needs to quickly proceed with the Proposed Transaction to avoid the ceasing of operations. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration to be received) and alerting shareholders to the omission to seek their otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
 
Publication Date*: 10/7/2014 Identification Number: 1130 Mailto Link
Frequently Asked Questions
Staff Interpretation Letter 2016-2
Identification Number
1144
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) to Nasdaq’s otherwise applicable shareholder approval requirements with respect to a proposed issuance of securities (the “Proposed Transaction”).
 
You represented that the Company has experienced a rapid and substantial deterioration in its financial condition due to several events each of which alone jeopardizes the financial viability of the Company. Additionally, in its most recent Form 10-Q, the Company noted there is substantial doubt in its ability to continue as a going concern.
 
In August 2015, the Company completed a private placement of convertible notes (the “Notes”), Series A warrants and Series B warrants. You stated that the Company is in default under the terms of the Notes and related registration rights agreement, and if declared in default by the Note holder, the entire principal amount plus interest and any penalties would be immediately due. Additionally, you stated that based on its current cash position, the Company expects in the near term to trigger a default under a technology agreement with its largest customer. You stated that without the Proposed Transaction, the Company does not have sufficient cash to repay the Notes or meet its obligations under the technology agreement and would have to seek bankruptcy protection.
 
In the Proposed Transaction, you stated that the Company will issue to one investor (the “Investor”) shares of common stock, a convertible note, and warrants to purchase shares of common stock equal to greater than 20% of the existing total shares outstanding. The price per share of common stock and conversion price of the note will be based on a 20-day simple moving average, and the exercise price of the warrants will be at a premium to the current market price. However, due to the fluctuation in the Company’s stock price, the price per share of the common stock and the conversion price of the notes may potentially be at a discount to the market value. Additionally, following the closing of the Proposed Transaction, the Investor could potentially own greater than 50% voting power and beneficial ownership in the Company.
 
You stated that part of the proceeds from the Proposed Transaction will be used to pay off the Notes as well as any interest and penalties accrued and past due. Any remaining proceeds will enable the Company to continue to meet covenants under its technology agreement and provide adequate capital for the Company to operate over the next 12 months. Additionally, the Company will lower the exercise price of its outstanding Series A warrants to an exercise price that is greater than the current market value. Finally, the Note holder will exercise the Series B warrants up to no more than the Note holder owning 9.9% of the shares outstanding. Any remaining Series B warrants will be canceled.
 
You stated that the Company has been unsuccessful in obtaining alternative financing given its current capital structure and depressed share price. Despite these efforts, you represented that there are currently no realistic alternatives to the Proposed Transaction and as a result, there is not enough time to obtain shareholder approval prior to the issuance of the shares of common stock in the Proposed Transaction as a delay may cause the Company to declare bankruptcy. You also represented that prior to the Proposed Transaction, the Company engaged an outside law firm to evaluate its options including bankruptcy. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
 
Without the requested exception, shareholder approval would be required:
  • pursuant to Listing Rule 5635(b) because the Proposed Transaction would result in a change of control of the Company due to the fact that the Investor will own greater than 20% of the common stock and voting power outstanding upon completion of the Proposed Transaction; and
  • pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price that may be less than the greater of book or market value.
Based on our review of the circumstances described in your correspondence and on your representations regarding: (i) the Company’s financial condition, (ii) the dire consequences to the Company should it not obtain the financing provided by the Proposed Transaction, and (iii) the Company’s expectation that it will remain in compliance with all applicable continued listing requirements upon completion of the Proposed Transaction, we have determined to grant the requested exception to the shareholder approval rules. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration received) and alerting shareholders to the omission to seek the otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
 
Publication Date*: 4/8/2016 Identification Number: 1144 Mailto Link
material_search_footer*The Publication Date reflects the date of first inclusion in the Reference Library, which was launched on July 31, 2012, or a subsequent update to the material. Material may have been previously available on a different Nasdaq web site.
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